Transition, Regional Development And Globalization: China and Central Europe

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Ken Morita Hiroshima University, Japan

Yun Chen

Fudan University, China

World Scientific NEW JERSEY

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LONDON

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SINGAPORE

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BEIJING

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SHANGHAI

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HONG KONG

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TA I P E I

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CHENNAI

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Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

TRANSITION, REGIONAL DEVELOPMENT AND GLOBALIZATION China and Central Europe Copyright © 2010 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher.

ISBN-13 978-981-283-344-0 ISBN-10 981-283-344-7

Typeset by Stallion Press Email: [email protected]

Printed in Singapore.

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To Our Families

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Contents

List of Figures

ix

List of Tables

xi

Photo

xvii

Introduction

1

PART I: ANALYSIS OF TRANSITION

33

1

An Analysis of Determinants of Regional Disparities in China

35

2

A Comparative Analysis Between Postwar Japanese Economic Reforms and Polish Economic Reforms in the 1990s

55

3

Key Industries and Development of Industrial Policies in Shanghai since the 1990s

71

PART II: INTERNATIONAL RELATIONS

101

4

Japanese Foreign Direct Investments in Central European Transition Economies

103

5

Development Strategies and Income Disparities in China: Comparisons with Central Europe

135

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Consequences and Trends of Japanese FDI in China and Central Europe

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Transition, Regional Development and Globalization

PART III: REGIONAL DEVELOPMENT AND GLOBALIZATION

249

7

The Economic Development and Regional Disparity of the Yangtze River Delta

251

8

A Political Economy of East Asian Authoritarian Development System

295

9

Regional Integration and Path Dependence: On the Relations among Europe, the USA and East Asia

405

Bibliography

455

Index

481

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List of Figures

Figure 1.1 Figure 3.1 Figure 3.2 Figure 3.3 Figure 4.1 Figure 5.1 Figure 5.2

Figure 6.1 Figure 6.2 Figure 7.1 Figure 7.2 Figure 7.3 Figure 7.4 Figure 7.5 Figure 7.6 Figure 7.7

Per capita GDP indices in provinces and cities in the three regions Ratio of city type industries to the whole industries in Shanghai (2000) Influential factors to city type industry Industrial location in Shanghai Japanese outward FDI worldwide (US$ million) The three big regions in China (East, Center and West) Changes of difference in per capita income of farming villages in Zhejiang province and Jiangsu province: Index (Jiangsu = 100) China’s ratio to Japan’s outward FDI (1987–2004) Function of international regime and sovereign partnership Cities in the regions of the Yangtze River Delta Concept on relationships between regional disparity and regional economic development Change of per capita GDP disparity (Shanghai, Jiangsu, Zhejiang) The expansion of Shanghai Economic Zone Disparity situation of per capita GDP among cities in the Yangtze River Delta Domestic branch location of Shanghai Pudong Development Bank City structure in China: A system where cities supervise counties ix

41 84 87 88 105 154 191

231 246 254 257 261 267 270 282 284

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Figure 7.8 Figure 8.1 Figure 8.2

Figure 8.3 Figure 8.4 Figure 8.5 Figure 8.6 Figure 8.7 Figure Figure Figure Figure Figure Figure

9.1 9.2 9.3 9.4 9.5 9.6

Figure 9.7

Disparity situation of per capita GDP among 47 prefectures in Japan Three kinds of authoritarian system in East Asia Conceptual figure on productive industrialization ratio and labor force industrialization ratio in Asian countries (1960s–1980s) Concept of the pitfalls in Southeast Asia Realization of shared growth in East Asian NIEs model Central organization system of the Chinese Communist Party Organizational system of the Chinese cabinet Economic development and systemic transition in East Asian NIEs model Regional structure of the UK export Regional structure of the UK import Regional structure of Japanese export Regional structure of Japanese import Prisoners’ Dilemma Ratio of inward and outward FDI amount to the world total percent Relative ratio of FDI

285 309 333

338 341 370 371 397 426 427 427 428 440 447 448

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List of Tables

Table 1.1 Table 1.2 Table 1.3 Table 1.4 Table 1.5 Table 1.6 Table 1.7 Table 1.8

Table 1.9 Table 1.10 Table 1.11 Table Table Table Table

2.1 2.2 2.3 2.4

Table 2.5

Per capita GDP indices of the top five and the bottom five (1955) Per capita GDP indices of the top five and the bottom five (1965) Per capita GDP indices of the top five and the bottom five (1975) Per capita GDP indices of the top five and the bottom five (1985) Per capita GDP indices of the top five and the bottom five (1995) Per capita GDP indices in the three regions Per capita GDP disparities between Shanghai and Guizhou (1970–1995) Investment amounts of fundamental construction in each region in each period (100 million yuan, percent) Industrialization index in China’s regions (1985) Industrialization index in China’s regions (1995) Real GDP growth rate and economic structure (beginning of the 1990s) Main economic indicators (Japan) Main economic indicators (Poland) Distribution of national income (Japan) Changes in real incomes in Poland (preceding year = 100) Changes in the composition of household incomes in Poland (percent shares in total incomes) xi

36 36 37 37 38 40 42 44

48 49 52 56 66 67 68 68

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Table 2.6 Table 3.1

Table 3.2 Table 3.3 Table 3.4 Table 4.1 Table 4.2 Table 4.3 Table 4.4

Table 4.5 Table 4.6 Table 4.7 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6

Percentage of Polish firms perceiving their domestic market as being in excess demand Production amounts of six major supporting industries in Shanghai (100 million yuan, percent) Details of six new major supporting industries in Shanghai (2001) Details of high-tech industry in Shanghai Details of city type industries in Shanghai (2001) Inflow of FDI in CEE countries and the share of Japanese FDI (US$ million) Structure of Japanese FDI in Hungary, 1990–1999 Investments by Japanese MNCs in Poland from 1990 till July 2000 Cumulative FDI by the major investing countries and Japan in Poland in the period 1 January 1990–30 June 2002 Investments by Japanese MNCs in the Czech Republic in the period 1990–2000 Japanese FDI in the Czech Republic and Poland in the period 1990–2001 Sales of cars produced by Magyar Suzuki Rt. 1997–2001 Several basic indicators of China and Central Europe Inward FDI in Central Europe (stock; US$ million, percent) Inward and outward FDI stocks as a percentage of GDP: China and Central Europe Major home countries of FDI in Poland (flow, 2004) (US$ million, percent) Major home countries of FDI in Hungary (flow, 2003) (million EURO, percent) Economic indicators of Polish economic performance

69 79

80 82 85 108 110 111 112

114 114 127 138 144 145 145 146 147

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List of Tables

Table 5.7 Table 5.8 Table 5.9 Table 5.10 Table 5.11 Table 5.12 Table 5.13 Table 5.14 Table 5.15 Table 5.16 Table 5.17 Table 5.18 Table 5.19

Table 5.20 Table 5.21 Table 5.22 Table 5.23 Table 5.24 Table 5.25

Unemployment rates in Polish voivodships (1997 and 2003; percent) Structural reform index Regional GDPs (Poland) Private sector as share of GDP, 1991–1999 (percent) Private sector as share of industry production in China (percent) Gross output of industry by sections and ownership sectors (percent) Inward FDI in East Asia (1997–2002; US$ billion) Major home countries of FDI in China (flow, actual; percent) Regional distribution of FDI inflow (percentage of national total) Ratios of the Yangtze River Delta to the whole of China (1995–2004) Industrial structure of Shanghai, Jiangsu and Zhejiang Details of export from Shanghai (1999–2003; percent) Long-term cooperation relationships between Shanghai industrial areas and state-owned enterprise groups Project numbers and investment amounts of inward FDI in Shanghai Details of export from Jiangsu province (1999–2003; percent) Details of export from Zhejiang province (1999–2003; percent) Ranking of business cities in China Comparison of per capita income disparity in the Yangtze River Delta region (1990–2003) Shares of Shanghai in 2004

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148 149 150 150 150 151 152 153 155 156 161 163 167

169 175 180 182 183 187

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Table 5.26

Table 5.27 Table 5.28 Table 5.29 Table 5.30 Table 5.31 Table 5.32 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6 Table 6.7 Table Table Table Table Table

6.8 6.9 6.10 6.11 7.1

Table 7.2 Table 7.3 Table 7.4 Table 7.5

Disparity structure in peasant’s per capita income in Zhejiang province and Jiangsu province GDP value added structure and employee structure The ratio of foreign enterprises in the export industries in Jiangsu province (2002; percent) Economic indicators of China’s economic performance Gini coefficient in China Per capita income of rural and urban areas in China Per capita GDP and disparity among three regions in China Regional GDPs (China) Major home countries of FDI in Poland (stock, actual; percentage) Per capita income disparities of rural and urban areas in China Per capita GDP and disparity among three regions in China FDI inflows in China (flow) Japanese FDI in Poland (stock) Main host countries of Japan’s outward FDI (2004, flow) Japanese FDI in China (flow) FDI concentration index Trade linkage index FDI-trade index Per capita nominal GDP: growth rate and rank (yuan) Growth rate of budget income Results of multi-regression analysis: the Yangtze River Delta in the 1980s Results: The case of 14 cities in the 1990s Results: The case of 21 cities in the 1990s

194

196 198 204 206 208 209 217 218 221 222 223 225 230 231 238 239 240 259 262 265 272 273

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List of Tables

Table 7.6 Table 7.7 Table 7.8 Table 7.9 Table 7.10

Table 8.1 Table 8.2 Table 8.3 Table 8.4 Table 8.5 Table 8.6 Table 8.7 Table 8.8

Table 8.9 Table 8.10 Table 8.11 Table 8.12

GDP growth rate of each sector: Shanghai, Jiangsu, Zhejiang Financial function and the rank: 21 cities of the Yangtze River Delta (whole area = 100) Results: 47 prefectures in Japan Regional structure and rank of branch number of Daiichi Kangyo Bank Time series change of the rank of general financial index: 47 prefectures in Japan (47 prefectures = 100) Real GDP growth rate Development of regional trade agreements with which China is concerned Some indicators of East Asian countries and regions Population below the national poverty lines (percent) Experience of studying abroad of Taiwanese technocrats Specialization of Taiwanese technocrats Some indicators on export products of South Korea (1970) Comparison of employment inducement in manufacturing export of Asian NIEs and Southeast Asia (1975) The ratio of urbanization in China (100,000, percent) Comparisons of labor force industrialization with productive industrialization in China Job structure of mobility population in Shanghai (100,000, percent) Number of graduates of universities (prime minister, vice-prime minister, state committee, chairperson, ministers)

xv

279 283 287 289 290

301 302 319 320 324 324 339 340

344 345 347 362

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Table 8.13

Table 8.14 Table 8.15

Table 8.16 Table 8.17 Table 9.1 Table 9.2 Table 9.3 Table 9.4 Table 9.5 Table 9.6 Table 9.7 Table A.

The Executive Committee of the Central Political Bureau in the Communist Party, which started in 2002 Leaders of the next generation Comparison of high ranking executives who graduated from Peking University and Tsinghua University Top 10 universities that prominent politicians had graduated from Details of the eight Democratic Party groups The effects on the GDP growth rate by creating East Asian FTA Regional trade ratio (percent) Per capita GNI and Gini coefficient in East Asia and EU US military alliance in the Asian Pacific region FTA effects on Japanese GDP (2010; annual, percent) Ratio of inward and outward FDI amount to the world total (percent) Relative ratio of FDI Regional trade ratio

382

383 384

385 387 413 423 425 431 439 446 447 423

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Photo

Photo 8.1

Actual situation of “the worst case of Dingzihu, eviction rejected family, in the history”

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Introduction

The purpose of this book is, as the title states, to comprehensively recognize transition, regional development and globalization. Regions and countries, however, on which we have focused our attention in this book are rather limited. They are China and Central Europe. In some chapters, we have concentrated on more limited regions and countries, which are the Yangtze River Delta region in China and, Poland and Hungary in Central Europe. The reason we focused on the Yangtze River Delta region in China is due to its characteristic development patterns such as Jiangsu province, which has a foreign-owned enterprise led development pattern on the one hand, while Zhejiang province has a private-owned enterprise led development on the other. Shanghai, which is the central municipality of the Yangtze River Delta, can be considered as situated between the two provinces. Recently, we can recognize some indications of differentiation within Zhejiang province. Needless to say, China has been, as a whole, a transition economy which has been classified as a gradual way of reform and as a growth-oriented reform. On the contrary, with regard to Poland and Hungary in Central Europe, the former transition has been said as a radical way and the latter as a gradual way. Furthermore, Poland has taken the transition classified as systemic reform-oriented. Further in Poland, their way of transition seemed to be a private-owned enterprise led pattern (not a foreign-owned enterprise led one) at their initial stage of transition. Meanwhile, Hungary has employed a foreign-owned enterprise led development from their initial stage. As far as Hungary is concerned, it started the reform in 1956 (much earlier than Poland). It indicates that its transition should not be depicted as a reform of the economic system, but a growth-oriented reform which means a “soft landing” of the systemic change. 1

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The respective characteristics in transition and development of respective regions and countries could be recognized. The aim of this book is to present reasonable analytical frameworks and reasonable viewpoints to clarify respective characteristics. Each regional development could be improved by taking into consideration the regional integration. The above-mentioned countries such as Poland and Hungary had tried to employ several policies on transition and development whose main goal was without any doubt to become members of the EU. Their affiliation with EU has significant effects on economic development in Poland and Hungary. China has also had closer relations with East Asian countries, which has been often called as “functional integration.” At the same time, in China, relationships between the central government and local governments have been crucial in considering most issues in China. As a matter of fact, China’s local governments have grouped for appropriate cooperation with local governments of other countries like Japan. For example, cooperation at the municipal level such as that between Shanghai and Osaka has become more important than before. As mentioned in this book, the above-stated cooperation cannot be recognized correctly without the USA, because globalization has generally been coming from Americanization. Post-war progress of the EU has been necessary for it to be recognized in association with the USA, and the way towards East Asian integration cannot be separated from the US strategy. We also think that the current movement towards regional integration particularly since the beginning of the 1990s might be interpreted as the way towards breaking away from path dependence. It is undoubtedly debatable, but we need to correctly understand the complex connection between globalization and regional integration tendency. In this Introduction, we have a short overview of each chapter, and the relationships among respective chapters. Part I is the analysis of transition, which consists of three chapters and contributes to clear recognition of the details and characteristics of systemic transition. The aim of Chapter 1 is to analyze determinants of regional disparities (not in questioning whether or not regional

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disparities would be expanded) in China from rather long-term points of view. As well-known, socialist China was founded in 1949, and after that its economy was developed based on the state-owned heavy industry sector in a centrally-planned system. The system prevailed for 30 years until Deng Xiaoping started the reform and open door policy in 1978. After 1978, along with the market-oriented reforms, coastal open strategy was implemented in the 1980s, which led to certain success. However, the development strategy in the 1980s was limited to attracting foreign capital and to encouraging private-owned enterprises, and this strategy delayed China’s reforms from the full-scale reform of state-owned enterprises. In addition, significant disparity between coastal and inland area had been brought about, and inside the Eastern coastal region, regional disparity among the regions was experienced. Non-state-owned sector regions like Guangdong model, Jiangzhe model, and Wenzhou model region enjoyed the economic expansion while state-owned sector regions like Shanghai suffered from disadvantages both in a systemic sense and in a political sense, which led to regional stagnation. It might be indispensable that adjusting the disparity between coastal and inland, and among coastal regions, is necessary in terms of economic development both in a systemic sense and in a political sense. We could recognize the facts in China until the middle of the 1990s as follows: (1) Per capita GDP of the (then) three municipalities under direct control by the central government, i.e. Shanghai, Beijing and Tianjin, constantly occupy top positions. (2) By breaking down the respective province and city, it is clearly shown that, with regard to the two provinces of Heilongjiang and Liaoning, which are the traditional industrial areas located in the North Eastern region, their per capita GDP started to decline at the end of the 1980s. In the 1990s, their positions dropped from the top five, whose ranks were replaced by Zhejiang and Guangdong provinces.

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(3) The bottom five positions have been usually occupied by provinces in the Western region. Based on the facts mentioned above, we could recognize that, since the 1980s, the Eastern region of China which has enjoyed the returns of a most developed economy, had a variety of disparities within. We could not help mentioning that each sub-region has experienced its own disparity in accordance with its own economic mechanism. Why has such disparity been brought about? In order to analyze reasons behind the disparities, we investigated their strategies for regional development and regional characteristics. With the reform and open door policy after the 1980s, disparities between traditional heavy industry regions led by state-owned sector in Shanghai and North East (Liaoning, Jilin, Heilongjiang) and open economic regions led by non-state-owned sector in South China (Guangdong, Fujian) and Jiangzhe (Jiangsu, Zhejiang) have become outstanding. What were the main reasons? With regard to the composition of the industrial sector, the latter of the above had a higher share of light industries while the former had a higher share of heavy industries. With regard to the industrial organization, the former of the above had a higher share of state-owned sectors and the latter had non-stateowned sectors. As far as economic reform process towards marketoriented system is concerned, it is easier for regions in which more market-oriented industries and industrial structures exist to introduce them. Those disparities have seemed to be closely connected with regional economic growth rates. In other words, basic reasons for economic disparity in the 1990s came from the difference of the speed towards market-oriented system. It also indicates the results of the reform process, because China’s gradual reform in the 1980s had chosen regional priority policy. To overcome such problems in the 1990s, China employed the omnidirectional reform and open door strategy. We could thus recognize that China seriously grappled with expansion of development regions, establishment of market-oriented systems, and improved efficiency state-owned enterprises.

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The purpose of Chapter 2 is to investigate economic reforms and growth in Japan after World War II, while taking into consideration the economic reforms of postsocialist countries, focusing our attention on Polish economic reforms in the 1990s. Differences in both domestic and international environments between postwar Japan and Poland in the 1990s were quite enormous. We recognize that application of postwar Japan’s experiences to the post-socialist Polish economic reforms was rather limited. Thus, in Chapter 2, our purpose is not to exhaustively examine the economic reform process, but rather is limited to focusing on a few essential factors in postwar Japan’s economic success, and comparing these with the Polish method of economic reform. There are some explanations about postwar Japan’s low value of marginal capital coefficient. With regard to the 1950–1960 period, crucial factors are considered to be: (1) labor intensive industries had a major share of overall industries and (2) postwar labor conversion from the military sector and excess labor in rural areas made labor price relatively cheaper. Private saving should be recognized as the main source of funding. The high propensity to save led to postwar Japan’s high rate of economic growth. Plausible explanation of Japan’s higher rate of private saving to GNP than in other industrialized countries, if focusing on the period until 1960, was undoubtedly the very high propensity to save by the unincorporated business sector. Although the exact figure of their propensity to save varies from different estimates, the rough figure shows that, in 1955 for example, the ratio of savings in the unincorporated business sector was 25 percent of before tax income (agricultural sector’s ratio was ten percent and employee sector’s was eight percent). It is not easy to simply explain the unincorporated business sector’s high propensity to save, but we can undoubtedly point to a few major reasons. Actually, about 38 percent of the unincorporated business sector’s saving was accumulated as equipment investment for their own businesses. Also, as the ratio of their transient income to overall income was higher than that for employees, they seemed to save money for precautionary purposes.

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We can conclude that, from the various characteristics of postwar Japan’s economic growth in 1950–1960, the following three are indicated as important factors, namely (1) competitive market structure, (2) high propensity to save by the unincorporated business sector, and (3) more equal distribution of assets and income in postwar Japan. With regard to postwar Japan’s economic reform, we can say the following: (1) because of the drastic systemic reforms, income and assets distribution became more equal and propensity to save by the unincorporated business sector became high. (2) Regarding the postwar Japanese industrial policy, although it is difficult to provide an overall evaluation, it is not easy to assert that industrial policy had a major impact on the industrial development of postwar Japan. A crucial reason for postwar Japan’s industrial expansion is considered to be the keen competition among domestic producers. Regarding Poland, we recognize that in the process of the Polish shock therapy, due to price liberalization under a monopolistic market structure, real wages have decreased and income distribution has adversely shifted. As a result, aggregate demand has decreased and the Polish economy has been in a deep recession. We suppose that it is not risky to insist that the story roughly sketched in Chapter 2 is what happened in Poland in the beginning of the 1990s. To date, the economic performance brought about through the shock therapy in Poland seems to be just the opposite from the case of postwar Japan. Competitive market structure and more equal income distribution are considered to be basic factors for postwar Japan’s economic growth, and the remarkable difference between postwar Japan and the Polish performance in 1990–1991. Therefore, in comparing postwar Japan’s economic reforms and economic growth with Polish economic performance in the beginning of the 1990s, the differences in (1) market structure and (2) income distribution are remarkable. We suppose that in postwar Japan, because of a competitive market structure and more equal income distribution, the domestic market expanded and the propensity to save became high. On the contrary, we recognize that in Poland in the 1990s, a market structure which was monopolistic, income distribution which was more unequal and the domestic market decreased.

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From the experience of postwar Japan, crucial factors for successful economic reforms in Poland seemed to be: (1) establishing many small and medium sized private enterprises with entrepreneurship, (2) making the market structure competitive, and (3) making propensity to save and investment higher through more equal income and assets distribution. In Chapter 3, we focused our attention on industries in Shanghai in the 1990s in order to investigate its development tasks and policy measures. In China regions are often classified as Eastern, Central, and Western, or coastal and inlands. As a matter of fact, however in China, such classification has never indicated the reality, because there have been earthshaking changes within each region. It can be said that newly growing cores have appeared through their competition. The deep rooted reasons for the growth for the Guangdong and Jiangzhe model and of relative stagnation of Shanghai, etc., are pointed out as follows. In China, in the 1980s, state-owned enterprises reform was in the beginning stage and was never in full scale. In place of full scale reform, Chinese government used such measures as Special Economic Zones and Special Development Zones, for foreign-owned enterprises and private enterprises to actively do business. The government measures have given rise to the Guangdong Model led by foreign capital and the Jiangzhe Model led by TVEs. In traditional Chinese economy, many state-owned enterprises have been crucial players. It can be said that, for nationwide balanced growth (through giving a chance to recover for state-owned industrial bases like Shanghai, North East and inlands), full scale reform of stateowned enterprises has been indispensable. In order to solve such a task, the Shanghai model was created in the 1990s. As a result of coastal open strategy, in such regions as South China, Zhejiang province, Jiangsu province, etc., the gap with Shanghai which had fallen behind the wave for market-oriented system was closing. As a matter of fact, Shanghai was behind the leading regions of establishment of city infrastructure like road, housing, electric power, water supply, etc. Shanghai in the 1980s was thus in a serious situation to be below the national average in industrial growth rate.

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Since the 1990s, due to geographical advantage, historical significance, etc., Shanghai has been receiving increasing attention. In Pudong area, a development strategy for Shanghai was devised. In the Yangtze River Delta and provinces in Yangtze River valley, it was stated that “Shanghai should be a core municipality for international economy, international trade and international finance, by which the Yangtze River Delta and whole region of the Yangtze River valley will have a new development.” Recently, in addition to the above, another goal which is to make it into an international distribution center has been included. Since the 21st century, Shanghai has been confronted with two serious tasks. First, in its move towards the international municipality, taking into consideration the fact that big cities all over the world have had the tertiary sectors centered industrial structure, Shanghai had established its city function as “the center of international economy, trade and finance” with the development strategy in industrial structure to be “3, 2, 1.” Through the 1990s, however, industrial development in Shanghai was especially remarkable and contributed to GDP growth more than other sectors, such as the tertiary sector which was damaged by the slump of the stock market. Should we recognize the gap between the target and reality? The second task is as follows. In the Yangtze River Delta, we had in the 1980s the Jiangzhe model and in the 1990s the Shanghai model which had different characteristics. Since the second half of the 1990s, we have recognized that the opportunity in which the comprehensive plan of the above two model regions has arrived. Such regional integrations as in the Yangtze River Delta and as in the Pearl River Delta have recently received attention in China. Economic relations between Shanghai and cities around it have particularly attracted considerable attention. The second task is how a vertical network can be built, in which Shanghai will occupy the peak, in order for the whole region to develop by reducing losses like redundant construction. The above first task enquires which relations should be between industrial structure and city function in the process towards an international municipality. The second enquires how the core municipality can keep the position.

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The two tasks (in Chapter 2) Shanghai has faced can be summarized as in which way is Shanghai able to grow towards an international municipality. They basically depend on industrialization and structural advancement of municipalities. As with the strategic goals, whole industries in Shanghai have thus become targets for economic reforms. Key industries and industrial policies for Shanghai to implement in the 1990s were expressed as “Shanghai New Industrial Upland Building” (building project of more advanced industry base than around area). This can be classified as reforming and adjusting “traditional industry,” and choosing and promoting the “key industry for Shanghai” (of leading industry based upon heavy industry), “Shanghai High-Tech industry” and “urban type industry for Shanghai.” Finally in Chapter 3, we show the following to be important: (1) First is about the main policy measures for the industrial development in Shanghai. The advantages and disadvantages of the “development area” need to be studied. (2) Second is about the relations between the secondary sectors and the tertiary sectors. We think that the “organic harmony” is the key towards industrial development. The proposal we make there is also a reply to the first task mentioned above, which is a “way to adjust the secondary industry in the direction towards an international municipality.” (3) Third is on the importance of the relations between Shanghai (China) and the close areas of foreign countries like Chugoku District (Japan). The Western part of Japan has had close relations with the Chinese continent in terms of human, physical, economic and cultural aspect, because of their geographic reason. In postwar Japan, much attention was paid to Tokyo, which might be related to the declining and closing economy and society in the Chinese continent. China had revitalization after the reform and open door policy started, which might surely be a good opportunity for the Western part of Japan to develop. We have some suggestions in Chapter 3 on the planning strategies.

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In Part II, we focus on international aspects of transition economies particularly risks and inward foreign direct investment (FDI) activities and, in connection with it, development models. Chapter 4 is to examine the transition in Central Europe (CE) with greater importance attached to inward FDI of Japan in their countries. The internationalization of multinational enterprises (MNCs) in the context of Central Europe (CE) has been intensifying since the beginning of transition in the region from central planning to market led in 1989. Since transition started, one of the most important modes of penetrating the CE market has been foreign direct investment (FDI). The supply of FDI in CE has been mainly provided by Western European MNCs, with Germany being the major player, followed by MNCs from the USA. The operations of the MNCs already operating in CE through an investment mode of market entry would seem to question the Uppsala stages internationalization model (suggesting processes of gradual and incremental international growth). The actions of MNCs that moved earlier on into CE can be explained using the network model of internationalization only for a limited number of cases. The ‘first mover’ behavior of foreign MNCs can be better accounted for using the transaction cost analysis model of the internationalization process as emphasizing among other factors, those of opportunism and asset specificity. All existing internationalization models refer to environments where change is characterized as slow, gradual, and with high level of predictability. CE markets are generally perceived as turbulent with quick and sometimes unpredictable environmental changes. Hence, investments in CE markets involve the assumption of risk that sometimes is difficult to estimate. It is generally higher than in relatively more stable and predictable markets. The international recognition of Japanese MNCs can be traced back to the early 1960s. At that time, they were predominantly involved in internationalization through exporting. In the majority of cases, exporting referred to transportation and electronic equipment. The use of the export mode of market entry intensified in the 1970s. Production activities, centralized in Japan, spread worldwide through

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FDI in the 1970s and continued throughout the 1980s and 1990s. According to the official statistics, Japan was the fourth largest world investor in 1994 and 1995 with FDI of US$18.1 billion and US$22.5 billion respectively. Despite the increase of FDI in absolute figures, Japanese MNCs could not keep the pace with the world’s largest investing countries. Japan dropped to sixth place in the world ranking in 1996 and 1997 with FDI of US$23.4 billion and US$26.1 billion respectively. In 1998 there was a decrease in Japanese FDI by 9.8 percent compared with its level in 1997. Japanese investment has shown a strong tendency towards preferential allocation. From being a negligible investor in the USA in the 1960s, by the late 1980s Japan became the second largest investor there, with more than 20 percent share of all cumulative FDI in the country. Japan is also an indispensable leading provider of FDI for the Asian countries. Japanese MNCs did not rush to take advantage of the investment opportunities in CE. Apart from some incidental acquisitions and greenfield investments in the period 1989–1997, Japanese MNCs did not engage in substantial FDI activities in CE. According to JETRO statistics in the period 1990–1995, FDI inflow from Japan into CE, including the Commonwealth of Independent States, was US$763 million, whereas in the countries of Taiwan, Thailand and Singapore the FDI inflow from Japan for the same period was more than six times greater. Initially, instead of investing in CE, some Japanese MNCs, for example Nissan, had given a strategic priority to creating extensive sales and distribution networks across the region, expecting those to be instrumental in gaining large shares in the CE markets. In the first years of transition, this strategy proved successful providing a 25–35 percent annual increase of Japanese exports to CE on a year-on-year basis. Since 1992, the export strategy has proved unsuccessful across the region. All the same, Japanese MNCs have demonstrated hesitant behavior in engaging themselves in substantial FDI activities in CE. In this respect, Japanese MNCs have been more risk-adverse than many of their Western European and North American rivals. Perceived uncertainties in the CE region and

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substantial psychic distance between CE and Japan may account for this behavior. Meanwhile, Western Europe was very much in the focus of Japanese MNCs during the 1990s, assuming that CE can be left for future consideration. Before the start of the transition in CE in the late 1980s, Japan had good economic and business relationships with the countries of the region. For instance, by August 1989, Japan had 19 joint ventures in the Russian Federation as a part of the former Soviet Union. In the 1970s, intergovernmental agreements on economic, industrial, scientific and technological cooperation were reached between Japan and most of the CE countries. Throughout the pre-transition period, some of the Japanese MNCs participating in trade and investment activities in CE were Ataka & Co., Itochu Co., Hitachi, Honda Motor, Kanebo, Matsushita Eclectic Industrial, Mitsubishi, Mitsui, Nissan Motor, NEC, Nissho-Iwai, Sony, Sumitomo Co., and Toyota Motor. Economic cooperation between Japan and CE started in the 1960s. In the 1970s, many licensing agreements were concluded between Japanese MNCs and CE governments for providing mostly technology, patents, and technical know-how from Japan to CE countries and from some CE countries to Japan. The most active countries in the process were Bulgaria, former Czechoslovakia, former German Democratic Republic, Hungary, Poland, and former Yugoslavia. In the 1980s, many international joint ventures were created between Japanese MNCs and various CE governments. For example, Japan was the most important international joint venture partner of the Bulgarian government outside the Soviet Bloc member states. Thus, we can conclude of Chapter 4 of this book as follows. Japanese FDI in CE has been disproportionately small in comparison to the size and significance of the Japanese economy, and the participation of Japan in the world FDI outflow. The overall FDI inflow from Japan into CE has been estimated to be US$2.9 billion at the end of year 2002. This amount is more than 17 times less than the German investments in the region for the same period and more than 15 times less than the US investment. Japanese FDI in CE in the period 1990–2001 represents a mere 0.75 percent of the total FDI

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inflow in the region. This may be due to the low level of interest shown in the early years of transition by Japanese MNCs for undertaking investment mode of market entry in the CE region. At a later stage, the Japanese have become very cautious, hesitant, and risk averse with regard to investment, as the Japanese perceive those market economies as uncertain and volatile. The CE economies where Japanese MNCs have invested can be divided into two groups. The first group comprises the Czech Republic, Hungary, and Poland. These three countries have attracted US$1.9 billion in Japanese investments by the end of 1999. They have been perceived as less risky and more promising because of their inclusion in the first wave of countries that join the EU in May 2004. While the Czech Republic and Hungary have attracted several large Japanese investments in the early years of transition, Poland lagged somewhat behind. This was due to the negative early investment experience of Daihatsu and Asahi Glass corporations. The more recent successful large investments in Poland undertaken by Isuzu and Toyota seem to have changed the negative trend. Japanese investments in greenfield ventures strongly prevail in the three countries. While in both the Czech Republic and Hungary Japanese FDI has resulted mostly in the creation of wholly owned subsidiaries, in Poland joint ventures have been the most common form of investment. The second group of countries consists of Bulgaria, Romania, and Slovakia. Investments in these countries have been perceived as riskier. As a rule, Japanese MNCs have invested in the creation of sales representative offices in the three countries. Incidental investments have been made in production, for example, in the wine industry in Bulgaria, color television sets production in Romania, and in the electronic sector in Slovakia. Post-transition Japanese investments in CE have been undertaken mostly on the basis of previous relationships between Japan and respective CE countries in the pre-transition period. While the Czech Republic and Hungary have been benefiting from the good pre-transition relationships between each of them and Japan, the favorable previous development of relationships between Bulgaria and Japan

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has been largely damaged in the post-transition period. This may be explained with the more stable environment and better progress towards transition to market orientation of the economies in the Czech Republic and Hungary than in Bulgaria, as well as the pitfalls in the early reform of the banking sector in Bulgaria. In the last few years, there has been a clear trend of gradual increase in the amount of Japanese FDI in CE. They show a high degree of gravitation towards the Czech Republic, Hungary and Poland. It can be suggested that the major drive behind this fact is the accession of the three countries to the EU since a strategic priority of Japanese companies has been to ensure a significant business presence in the single market of the EU. The investments of Japanese MNCs in the manufacturing sectors in CE have been vertically integrated with other Japanese businesses. A good example is the automobile industry where vertical integration has been achieved within and across national borders inside and outside the CE region. Japanese investments in other parts of the world have been far more substantial than in CE. Japan is among the world’s largest investors. The industrial and technological capabilities of Japanese companies have been renowned all over the world. Their experience in know-how development and adoption, and productivity improvements can be a major source for revitalizing the industrial sectors of the CE countries. The Japanese companies need to enhance their understanding of the CE business environment and be offered support in establishing reliable contacts with CE institutions and businesses. CE governmental and non-governmental institutions could play a major part in it. In addition, CE governments can learn from each other’s experience in attracting Japanese investors to their specific country contexts. The long term commitment and decisive investment of Japanese businesses into CE can send an encouraging signal to CE governments and businesses for mutually beneficial investments. The Japanese companies should focus on developing a regional, CE, investment strategy for market penetration and development, rather than considering the CE mostly as a springboard to EU markets and a low cost production base.

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Chapter 5 is about the topics on Chinese development model attaching greater importance to the Yangtze River Delta area in comparison with European transition economies, because so far we have never had analyses on transition and development in China particularly in comparison with Central Europe, which undoubtedly has led to insufficient assertions upon its features and its way towards transition in China. Most standardized point of view we now have indicates that China has been attempting its gradual transition from a centrallyplanned to market-oriented system, even if China has never displayed systemic change in formal sense (meaning from socialist system to capitalist system). Also, the standardized view tells us that China has been successful in its transition. In Poland, they have recognized it as being reformed in a radical way towards a market-oriented system (Poland has transformed from a socialist to a capitalist system), and generally speaking the Polish transition has been evaluated as successful in Western countries, although this might be a little different from domestic evaluation. Unless we are very specific about a problem, arguing whether a reform is “radical” or not does not seem to be so meaningful. A more important way of approaching it is looking at what policy goals a transition economy has. We should also ask what benefits and what costs the transition economy would have in completing the policy goals, and if the policy has been appropriate or not. We think it is necessary to investigate reforms from such viewpoints. Undoubtedly, it is rather hard to recognize transition in China correctly. However, we think it is possible to indicate several crucial points at issue. The Chinese way of gradual reform has been also classified as growth-oriented (pointed out by, for example, Pomfret (1997), and also mentioned by Morita and Bozyk (1997), and Morita (2004)). Also as indicated by, for example, Sachs and Woo (1994) and Balcerowicz (1995), the Chinese transition depends on its characteristic and initial conditions. Actually before reformation, China had a loose social structure and it was covered by extensive agriculture. In addition to the above, it is huge in area and has remarkable variety. Under such circumstances, going ahead with

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liberalization and democratization at a stroke would neither be possible nor wise. What we should acknowledge is the importance of the existence of Deng Xiaoping, who was a prominent strategist who knew all important matters about the situation at home as well as abroad, and was called the chief designer for reform and open door policy in China. Various factors would be necessary in order to accept such a strategy and design, and the lead to growth. In Chapter 5, we have attempted to extract a key factor by observing interesting developing models in the Yangtze River Delta region, which are Zhejiang province led by private-owned enterprises and Jiangsu province led by inward FDI. In particular, the four cities of Zhejiang province which are Hangzhou, Ningbo, Wenzhou and Shaoxing, are ranked within the top ten cities, traditionally accumulated human resources in Zhejiang province. The social and cultural background of Zhejiang province has never been accidental, but it has accepted a market-oriented system based on traditional culture and climate in Zhejiang province. Such accumulation of human resources have made the grass roots market economy possible. We think that those interesting trends we could observe in Zhejiang province can provide important leads for transition and development by making the path clear. Needless to say, inward FDI which has highly contributed to the growth of Jiangsu province (and of Guangdong province) has played a remarkable role for the transition. Particularly, the existence of Chinese business network for foreign investment has been indispensable for FDI inflows in China as more than 50 percent share of Hong Kong, Macau and Taiwan displays. To successfully accept the inward FDI needs, however, some circumstances have served as resources. It is the reason why we think the culture and climate in Zhejiang province have been crucial key factors for successful transition and development. As indicated with Gini coefficient, income disparity in China has been beyond comparison with Central European transition economies. It suggests that as Pomfret’s analysis mentioned, China is

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“growth oriented” (1997). China has to have a more “system change oriented” reform (as described by Pomfret to be the Central European way of transition). China, as a matter of fact, has employed more system change oriented measures such as promoting labor mobility through reformation of the family registration system, as well as such growth oriented industrial policy as Go-West Strategy in 1999, Industrial Region Promotion Strategy in North-West region in 2001, and Central Region Promotion Strategy in 2003. It would be therefore indispensable to investigate actual changes of disparities in China and to exactly recognize the way of Chinese transition, because those are necessary steps to construct a better theory of transition and development. As was mentioned previously, the purpose of Chapter 5 is to examine reasons of successful gradual transition in China, through observation of the Yangtze River Delta region, through present situation of inward FDI, through the impact of development model differentiation and through comparative analysis with Central Europe (particularly with Poland). As stated above, there have been huge differences between China and Poland, including area and population. It has been the “Zhejiang Model,” in which they have had the advantageous climate for a business mind. Since the founding of a nation after the Second World War and under the socialist system such an advantageous climate has never become extinct. We think that should be a key factor for the success of Zhejiang Model. (According to the way of expression in evolutionary economics, it is none other than “path dependence”). The current situation tells us that the Zhejiang Model has been more developed with the inflow of FDI. Another big difference of Poland has been the existence of Chinese business network whose ratio of the total FDI inflow in entire China has remained around 50 percent. The existence of the Chinese business network, meaning Hong Kong, Macau, and Taiwan (including The British Virgin Islands), should be correctly recognized as contributing to China’s successful transition. As Pomfret (1997) correctly indicates, “China’s economic reforms were intended to produce economic growth not system

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change” (p. 437) and Central European countries have “taken serious steps toward becoming market economies” (p. 439). Related to such a way of transition, China has suffered from income disparity and Poland huge unemployment rate. It can be predicted that in recent years, China has put a little more weight on system change leading to changes towards a more flexible labor movement, and Poland has placed a greater importance on producing more economic growth (as observed by the huge amount subsidy for the coal industry). The various ways of transition should be understood as evolutionary phenomena accompanied by a variety of diversities. The purpose of Chapter 6 is to analyze the consequence and trends of Japanese FDI in transition economies paying more attention on comparisons of China with Central Europe than in Chapter 4. Generally speaking, transition economies have more barriers to attract inward FDI compared with advanced industrialized economies. We focus our attention in this chapter on China and Poland as host countries, both of which have their own characteristic barriers for inward FDI in a systemic sense. We also focus on Japan as a home country, whose companies are recognized to be risk-averse. The following three issues are analyzed in Chapter 6: (1) based on risks related to systemic transition, we investigate motives and determinants of Japanese FDI in Central Europe and China, (2) taking into consideration the above-mentioned characteristics of China, Poland and Japan, it can be said that the scale of Japanese FDI in China and Poland has been rather small. We analyze here if this scale is reasonable, and (3) we examine ways among countries concerned to alleviate system-related risks focusing our attention on “sovereign partnership approach.” By considering Japanese FDI in China and Central Europe, we can say that Japanese FDI in Poland kept its scale small and its motive shifted from market-seeking to export-seeking particularly in automobile and related industries. Those resulted from: (1) unsuccessful results of Polish radical transition than what was expected, and (2) freer movement of goods and factors with EU accession. Japanese FDI in China showed that its motive shifted from export-seeking to market-seeking mainly in automobile and related industries, and

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consumer electronics industries, which was definitely recognized first in 1995. Also in 1995, the ratio of manufacturing increased and regional accumulation of FDI towards the Yangtze River Delta, particularly in Shanghai and Jiangsu province, expanded. Japanese FDI in China expanded again in 2000; its motive indicated a clearer trend of market-seeking. Fundamental factors of the trend were: (1) GDP increase, which seemed to be closely connected with successful gradual transition in China, and (2) institutional improvement on inward FDI accompanied by WTO accession. Major characteristics of Japanese FDI as mentioned above might be brought about by big scale FDI into automobile and related industries, and of consumer electronics industries, whose industries are with product differentiation. Based on such characteristics, we think a determinant of Japanese FDI in Poland and in China is managerial resources disparity (see Komiya, 1972, p. 178). We recognize that, even with managerial resources disparity, because there are several risky factors, FDIs are not so active. The sovereign partnership approach can be mainly used to interpret the phenomena as well as other theories. In this book, thus, sovereign partnership approach is examined as one of the possible ways to create international regime. The sovereign partnership approach expresses cooperation between sovereign states, which works to reduce risks in China and Central Europe. It is a partnership to protect economic rights and interests for both investor companies and host countries through bilateral and multilateral agreement among sovereign states. Governments concerned take action for relevant corporations and persons of the sovereign states. Their relations with the parties are completely independent, by which their welfare could be increased. The reason such formal relations are important is to guarantee investor companies protection of their necessary conditions under participation of host government. The sovereign partnership agreement can provide investor companies legitimate rights in host countries, with which they can avoid risk of unlicensed concerns. It is easily recognized in risky host countries that investor companies could not be given enough legitimate rights. Home governments, thus need to take action for respecting mutual sovereignty standing for investor companies (Morita and Rosefielde, 1994).

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In cooperation with home government, it becomes possible to create order consisting of legal system improvement, etc., which is not easily established by transition countries. Such business setbacks as compensation for damages are tried to resolve within an agreement signed by governmental organizations. Dominant governmental organizations exercise, through sovereign partnership, leadership over subordinate organizations, for example, to approve and cooperate in adjusting business setbacks. Needless to say such action is not based on altruistic reasons, whose raison d’étre is expected benefits exceeding expected costs. The sovereign partnership seems to bring about opportunities for more FDI and for more development of transition economies. Probability of success with such agreement could increase, when more countries participate in the joint insurance system. We investigate in Chapter 6 a reasonable explanation for the function of international regime and sovereign partnership, by interpreting it in line with McKinnon’s analytical framework (1991). A short conclusion of Chapter 6 is as follows: (1) As far as motives are concerned, we recognize a trend that the main motive of Japanese FDI in Poland has shifted to exportseeking and of Japanese FDI in China to market-seeking. It is reasonable to understand the determinant of Japanese FDI in Poland and China is disparity of managerial resources accumulation. (2) Approaching with FDI concentration index and trade linkage index suggests that it is difficult to support an assertion maintaining Japanese FDI scale in Poland might be comparatively small, and an assertion insisting Japanese FDI scale in China might be comparatively small is supportive. (3) Prospectively sustained macroeconomic growth and more globally standardized rules provided by WTO and EU accession will become Japanese FDI in China and in Poland more active. Part III is focused on relationships between regional development, particularly regional integration and the tendency of globalization.

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The purpose of Chapter 7 is to examine, taking into consideration the 1980s and 1990s, economic development and regional disparity in Yangtze River Delta and policy tasks in the future. Needless to say, because of the tasks Yangtze River Delta region has faced intensively reflect the same tasks for all over China since the 1980s, the analysis in Chapter 7 can become a meaningful lesson for the development of other regions in China. By considering earlier literatures on disparities in China, the analysis of this chapter has the following characteristics. First, we take up the Yangtze River Delta region, which has been attaching greater importance on its economic development in the 1990s to be analyzed here, and examine the region by classifying it into the larger region and the smaller region. The larger region encompasses 21 cities, which are the Shanghai directly controlled municipality under the central government and the whole area of Jiangsu province and Zhejiang province; on the contrary, the smaller region has 14 cities closely encircling Shanghai. The geographical area of the 14 cities concerned here of the smaller region of the Yangtze River Delta is generally consistent with the Yangtze River Delta designated as one of the coastal open areas in 1985. What should be indicated here is as follows; as for the abovementioned “urban areas” usually mean the city area in which urban citizens having family registration live. “Urban areas” in this chapter point out the whole area of larger cities’ administrative districts in which counties are supervised by cities. It therefore means the “urban areas” in this chapter include both city controlled region of city areas (“urban areas” indicated above) and counties and towns classified as “rural areas.” Due to complications of “urban areas” in China, we have non-farming population showing the degree of urbanization as a probable explaining factor for disparity among cities in Yangtze River Delta, and we have prefectures in Japan, not cities, as comparative regions for our analysis. Second, in Chapter 7 we study tasks of development from viewpoints of wider frameworks like economic development theory not from rather limited frameworks. As asserted by Myrdal (1957) the accumulated disequilibrium in less-developed economies, immature situation of market economy

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has hindered trickle-down effects for its development. On the contrary, in developed economies, backwash effects among regions as well as trickle-down effects work. When its latter effects contributed more than its former effects, it reduces the disparity between developed and less developed areas. Forming the regional economic area, which can work such a mechanism, is a hopeful way to diminish the disparity. As for China, for example, it gets away from the traditional system by dividing regions at many places directed by administrative division towards more flexible regional economic areas. In China, we cannot have measures to indicate “area” like commuting ratio, etc. In Chapter 7 we will therefore not investigate to measure it but mainly examine conditions to form the “economic area.” We will formulate hypotheses for the conditions such as: (1) establishing market-oriented system based on reforming stateowned enterprises and, (2) creating the growth center in the region with supporting area at its hinterland. More things on what should be mentioned in Chapter 7 are as follows: (1) we will analyze the actual situation and its significant determinants of disparity in the Yangtze River Delta region in the 1980s and 1990s, and also analyze changes of formation of regional economy and compare it. Particularly taking into consideration the Yangtze River Delta region which meets the conditions for regional economy formation, we investigate empirically the layer structure of city function, focusing our attention on financial aspects. Moreover, (2) in order to make clear the characteristic policy tasks of economic development in the Yangtze River Delta, we will compare it with economic development in postwar Japan. Through comparative analyses between various cities in the Yangtze River Delta and 47 prefectures in Japan in terms of disparity, its determinants, regional layer structure, etc., we consider the differences and similarities between the two. Both examining actual situation and its determinants on regional disparity, and investigating regional economy formation, we can recognize relationships between them. That is to say, the actual situation of regional disparity might be a base to consider whether or not there exists a center of regional economy which is a necessary condition to form regional economic area, and to investigate the establishment of

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a market-oriented system which is another necessary condition for forming regional economic areas. The results which we have of the above-mentioned analysis and policy tasks related to regional development in the Yangtze River Delta in the future are summarized as follows. First, it is necessary to eliminate disparity on non-state-owned sector among cities in the Yangtze River Delta, which means a necessary influence to reform state-owned enterprises. It is also necessary to carefully examine disparity from promotion of private-owned enterprises and attracting foreign-owned enterprises. Undoubtedly, we insist state-owned sector reform leads to more progress towards market-oriented economy. Second, although the work force of agriculture and forestry industry in Japan was not a significant factor of regional disparity, in the Yangtze River Delta as of 1998 non-farming work force was the main significant factor of disparity among cities as well as non-stateowned sector. It means the Yangtze River Delta region has been confronted with the problem of how to appropriately adjust to progress of urbanization among cities. The core of disparity issue in China was the disparity among farming sectors. We can confirm in Chapter 7 that disparity among rural areas including a large city administrative district (meaning a system in which a city supervises county) took significant effects on disparity among cities in the Yangtze River Delta. Third, the Japanese case study illustrates the important role of the heavy chemical industry on economic development. However, the heavy chemical industry in China, undoubtedly including the Yangtze River Delta region, which combined with state-owned enterprises has become stagnant under the transition wave towards market-oriented system since the 1980s. Meanwhile, the light industry has developed in the 1980s, led by foreign-owned enterprises (Guangdong Model) and TVEs (Jiangzhe Model). However, imbalance between the more developed light industry and the less developed heavy and chemical industries might be difficult to lead China to a more developed country. As there has been significant correlation between traditional state-owned enterprises and heavy and chemical industries, it is an important task to find way(s) to develop

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heavy and chemical industries as well as reforming state-owned enterprises. Fourth, the case study on the Yangtze River Delta region shows that disappearing regional disparity (in order to develop the regional economy) has an indivisible relationship with forming a regional economic area to breakdown the cyclical and accumulative poverty. Also in Chapter 7, we illustrate the importance of creating a regional center to establish a regional economic area. In the 1990s, we can say China had the initial success to create a growing center, Shanghai, by policy measures. However, Shanghai in the 1990s was more concentrated (in financial functions) than Tokyo. Thus promoting cities such as Nanjing, Hangzhou, Ningbo, Suzhou by policy measures to be sub-growing centers is a necessary condition for reasonable development of urban economic area in Yangtze River Delta. We pay attention in Chapter 8 to the characteristics of the East Asian model. The main purpose of this is to find several empirical rules, which are not obvious in authoritarian development system. In order to examine the above issue, we classify in this book authoritarian development models of East Asia into three, which are (1) East Asian NIEs model, (2) Southeast Asian model, and (3) Chinese model. Empirical rules indicate the rules which became tangible to some extent in East Asian region, and are likely to come into existence also in China in the near future (which have rather universal validity). There can be difference from one country to another. Special circumstances of respective countries should be added when we investigate the logic of development model. Even in the same country, there could also be differences between periods due to particular characteristics of a respective period, because compared to a democratic political system with fairly mature separation of the three branches of government, the authoritarian development system undoubtedly has a relatively unstable structure. Such special circumstances arise from various factors like a leader’s personality, size of the nation state, as well as racial and religious complexity.

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We state in Chapter 8 various characteristics of political and administrative aspects in East Asian model with explanation of the Taiwanese experience. The following two are the most important. (1) We recognize that both agricultural land reform and local autonomous system at the early stage of development (1950s) were the bases to make authoritarian system in Taiwan stable. Compared with Taiwan, South Korea was similar in carrying out agricultural land reform, however, with regard to political system, a direct election of the President was put into effect in earlier period (1987) but direct elections in local areas were realized at a later period (1991). The process of democratization in South Korea “from the top to the bottom” was the opposite of Taiwanese democratization process of “from the bottom to the top” (what is called a direct election of the President in Taiwan was implemented in 1996 for the first time). The difference of democratization process of South Korea from Taiwan might be related to an economic development model in which the chaebol (South Korean zaibatsu) played the central roles. That is because at the election of the President the chaebol could work better than inconsistent ordinary people, and also because the chaebol contributed to relative stability of the political situation and for the maintenance of an authoritarian system. On the contrary, the Taiwanese model of economic development could be said as small and medium sized enterprises played important roles, which might be related to the local autonomous system. However, even if we could recognize significant causal relationships between authoritarian system and industrial structure, it might be difficult to judge scientifically the cause and effect of the two. (2) Under the extroversive market-oriented system, groups of technocrats were promoted to political leaders and administrative executives. At the institutionally less developed stage, those technocrats demonstrated their ability of institutional rationality and moral independence which played a kind of

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substitute of immature institution. Accompanied by evolution of socio-economic system to be more complicated, in order to have better governance, wisdom of technocrats group became never enough, which led to active involvement of civil society for public policy. It could be recognized as a prelude to political democratization. In line with the social tendency, institution building, particularly establishment of legal order became a central task for the society, also in concert with which characteristics of top leaders and bureaucrats transformed from science and technology centered to law and politics centered. In addition to the above two Taiwanese experiences, East Asian NIEs model countries and regions have some similar social characteristics, examples of which are as follows. (1) They are racially homogeneous countries and regions, which seemed to contribute for promotion and maintenance of social centripetal force. (2) They have polytheism. It might have come from Confucian supremacy, which contributed to social generosity. (3) They are small-sized countries and regions, which made sustaining social uniformity easier. With regard to external environments for East Asian NIEs model countries and regions, we could recognize some common characteristics. (4) In particular, they have been supported by the USA directly or indirectly. Both South Korea and Taiwan have been directly supported by the USA. The USA also contributed to both Hong Kong and Singapore for their export market and for developing their technocrats. Can China become a member of East Asian model? Analysis of two Asian models gave China careful suggestions indicating that, without establishing a people-centered model of economic development, it is impossible to have successful modernization and successful systemic transition.

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Through Deng Xiaoping’s reform and open door policy, China gained the initial logic towards extroversive market economy. However, it was only a necessary condition but not a sufficient condition. In Chapter 8, in light of shared growth concept we analyze the problems of Chinese society from viewpoints of (1) relations between urban and rural, and (2) characteristics of bureaucrats, which lead us to the following concluding remarks. (1) There are serious difference in industrialization ratio between production and employment. We should emphasize a necessity to introduce industrial policy attaching greater importance on employment, and policies related with rural areas to make peasants more active and freer (by such measures as land reform and local autonomous system). (2) Since the Deng Xiaoping’s reform and open door policy in 1978, China is still being ruled by technocrats in science and engineering. However, we could recognize substantial change from the end of the 1990s. Compared with the traditional ruling of a country by technocrats, bureaucrats in economy and finance have occupied a significant position in the Chinese administration. We think that this has been caused by the development ideology towards open economy and open society. In China, the necessity to have experts in economic and social management has been recognized which seems to be an irreversible tendency. Meanwhile, at the same time, China has serious tasks to overcome, which are (i) dual structure of bureaucracy in vertical administration strata and (ii) corruption. (3) In the days of globalization, introversive management of the economy and politics has become impossible. Internal problems might be received by international influence. We could also understand that, when China tries to solve the above stated problems, the logic of “authoritarian system is opposed to authoritarian system” comes into existence. The purpose of Chapter 9 is to investigate the way towards East Asian integration compared with particularly EU. As the title of

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Chapter 9 indicates, as the successful integarion needs several hard conditions like EU, we approach the regional integration issues with path dependence analysis. The Vienna Institute for Comparative Economic Studies (WIIW) showed in February 2008 that “the majority of the new EU member countries have been enjoying a period of robust economic growth.” Even with the global financial market troubles, the GDP growth rate of these countries is expected to only slightly decrease to be around five percent (over the period 2008–2010) from about six percent in 2007. According to WIIW, their economic growth will be mainly coming from rising consumption and investment, the “latter will be bolstered by much higher transfers from the EU budget.” Both rising consumption (from rising labor incomes) and investment, and EU budget transfer are needless to say the effects of joining EU. We can point out from viewpoints of Chapter 9 that they are positive due to their extroverted tendency towards EU. Compared with the tendency towards extroversion in EU countries, East Asia has been seriously characterized by introversion (immature nationalism), based on which it might become difficult to view their creation of institutional integration. In Chapter 9, we examine the issues with the neo-institutional approach. We can recognize, from our points of view, the following three as more significant ones, which are: (1) The assertion saying that the East Asian Community can be considered as a positive functional organization which will not move in a wrong direction towards protectionism and introverted tendency of EU and NAFTA. When the Asian Community is created, it can be positively evaluated to promote free trade. This kind of assertion seems to be important because it leads us to correct relations among Europe (EU), the USA (NAFTA), Japan and China (East Asian Community). (2) The insistence stating that the national interest of both the USA and Japan has common grounds by creating the East Asian Community. If such insistence is correct, both prerequisites of construction of peaceful and friendly relations between China

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and Japan, and reinforcement of US-Japan alliance can exist without contradiction. Thus, the East Asian Community can be created successfully through the drastic changes (as insisted by Munakata, 2006). (3) The assertion from viewpoints of the neo-institutionalist approach. The above-mentioned insistence (2) is difficult to be consistent with the neo-institutionalist approach. From the institutional point of view, as far as custom and culture is different, searching for the simplification and unification in the sphere of social order is unrealistic. Thus, the creation of an East Asian Community is doubtful. Such assertion is meaningful because it leads us to the assertion of path dependence. Therefore, it seems to be reasonable to introduce the neo-institutional viewpoints when we argue the community issue closely relating China and Japan. Actually the analysis in Chapter 9 is closely connected with our analyses such as those cited in Chen and Morita (2005), Morita and Chen (2006). The analysis of Chapter 9 relates an issue whether or not it can be broken away from path dependence. If it is able to break away from path dependence by the drastic change, the East Asian Community can be created successfully. On the contrary, if to intensify the unification of custom and culture is difficult (if path dependence of respective country can be maintained), it is difficult to create the East Asian Community. Chapter 9 also points out the progress of “de facto integration” of East Asia. We study the significant existence of the USA as the order providing agent in the region of East Asia, which leads us to the significant introversion of East Asian countries. It thus means that in East Asia, we need the transformation from “nationalism” to “internationalism” (from “introversion” to “extroversion”). It is easily recognized that, among East Asian countries, the tendency towards FTA has been accelerated and trade ratio among inter-regional countries to the world total has become larger. However, with regard to FDI among inter-regional countries, there could become significant difference between EU and East Asia.

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This suggests the existence of various risks in East Asian countries coming from the “introversion.” Such risks seem to be closely connected with custom, culture, history and institution, etc., as often pointed out in FDI issues. We think the problems suggest those related with path dependence. The big difference between EU and East Asia can be said, in other words, are the problems on path dependence. Based on the investigation from viewpoints of neo-institutionalist approach, as stated repeatedly in this book, once path dependence is recognized, it is not easy to break away from institutional importance. Then what are necessary to break away? By expressing in a simple way, the necessary conditions are: (1) extroverted oriented change, (2) domestic demand led growth, (3) economy with strong institution, and (4) moving towards a regional community depending on mutual confidence and shared desires. Such drastic changes make the East Asian Community plausible by breaking away from the path of dependence, which also yield decreasing returns and competitive market possible. In our way of expression, they are changes (1) from nationalism to internationalism, (2) from introverted activities to extroverted activities, and (3) positive construction of regional order by positively promoting international exchange. The conclusions we can reach in Chapter 9 are as follows: (1) In the East Asian region, we can recognize the de facto integration or functional integration compared with the institutional integration of EU. (2) Creating the East Asian Community or such community in Asia can be considered as a positive functional organization which can check movement towards protectionism and introverted tendency of EU and NAFTA. It is a correct way for the primary purpose of WTO to complete. We think it is correct to recognize the relations between globalization (like WTO) and regional integration (like EU, NAFTA and East Asian Community) as such functions as checking not to move towards a wrong way. (3) We can also recognize the similar tendency of international trade of UK with Commonwealth Nations and the (then) EC when

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(4)

(5)

(6)

(7)

(8)

31

UK joined the then EC, and international trade of Japan with the USA and China after around the year 2000. It describes the progress of de facto integration. We understand the significant existence of the USA as the orderproviding country in the East Asian region and the significant introversion of East Asian countries. We think it means that in East Asia we need the transformation from “nationalism” to “internationalism” and from “introversion” to “extroversion.” It is easily recognized that, among East Asian countries, the tendency towards FTA has been accelerated and the trade ratio among inter-regional countries to the world total has become larger. However, with regard to FDI among inter-regional countries, there could be significant differences between EU and East Asia. This suggests the existence of various risks in East Asian countries mainly those from the “introversion.” From viewpoints of neo-institutional approach, it seems to be difficult to think that the East Asian Community can be created in the near future because breaking away from path dependence of (probable) member countries particularly of Japan and China is difficult, because the custom and culture, etc., are significantly different. From viewpoints of neo-institutional approach, in order for East Asian region countries to break away from path dependence, it is indispensable to transform from introverted activities to extroverted activities, from nationalism to internationalism.

The above description is the main message of this book, with which we thus finally think that, since the beginning of the 1990s when transition started, because of the demise of Cold War and the failure of Soviet-type socialist systems, globalization led by the USA way of market-oriented efficiency system has become more dominant. It has undoubtedly made international economic and political systems more competitive, which has led overall international economy and politics to become more efficient towards integration. FTA expansion movement can be interpreted by practical ways along with theoretical

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considerations. It also points out to more advanced types of integration like community. Integrations such as the EU, NAFTA and (potential) East Asian Community have been shown as examples of this tendency. How should we interpret the integration tendency? As it can be competitive towards increased efficiency, it means to break away from path dependence. Thus, this book debates how we can break away from path dependence to diminish barriers arising from differences of institutions, cultures, customs, etc. On the occasion of the publication of this book and at the close of this Introduction, we would like to express our gratitude for the financial support of (in no particular order) the Humanities and Social Science Planning Project of the Ministry of Education in China, ‘Empirical Study on Economic Development Model in China (2008–2010, Project Number: 08JA790021)’, the Philosophy and Social Science Priority Project of the Ministry of Education in China, ‘Study of Macro Policy on Energy Saving and Reduction of Pollution Discharge (2008–2010, Project Number: 07JZP0008)’, the Shanghai Planning Project in Philosophy and Social Science, ‘Empirical Study on Regional Development and Income Disparities (2007–2009, Project Number: 2007BJL002)’, and the Japan Society for the Promotion of Science (Grant-in-Aid for Scientific Research), ‘The Bubble Phenomena and the Function of Futures Markets in China (2008–2010, Project Number: 20530242)’.

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Part I

ANALYSIS OF TRANSITION

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Chapter 1

An Analysis of Determinants of Regional Disparities in China

1. Introduction In countries such as China, which has a huge scale and a wide variety of regional diversification, it seems to be more complicated to scientifically analyze the actual situation and changes, and also determinants of the disparities. Since the founding of a country, various studies would have been made public on topics such as enquiring if regional disparities were reduced or increased. We have found several answers for it, depending on the subject regions, the subject period, as well as indices and methods to measure disparities. The purpose of this chapter is to analyze determinants of regional disparities, and not to enquire whether or not regional disparities would be expanded.

2. Actual Situation and Changes of Regional Disparities in China 2.1. Per capita GDP indices of top five and bottom five provinces, direct controlled municipalities under central government and autonomous regions Per capita GDP disparities among regions, after the founding of a country, have shown very interesting changes. Tables 1.1–1.5 show the top five provinces, directly controlled municipalities under central government and autonomous regions, and the bottom five provinces, directly controlled municipalities under central government and autonomous regions in 1955, 1965, 1975, 1985 and 1995.

35

Beijing

Tianjin

Heilongjiang

Liaoning

Henan

Yunnan

Sichuan

Guangxi

Guizhou

793

373

330

254

243

91

91

78

77

66

619

291

257

198

190

71

71

61

60

51

Source: Chinese Statistical Bulletin. Note: Indices indicate per capita GDP of each province and city/per capita GDP of whole China.

Top Five

Per capita GDP (yuan) Indices

Bottom Five

Shanghai

Tianjin

Beijing

Liaoning

Heilongjiang

Fujian

Shandong

Guangdong

Guangxi

Henan

944

533

388

323

314

136

128

121

116

102

494

279

203

169

164

71

67

63

60

53

Source: Chinese Statistical Bulletin. Note: Indices indicate per capita GDP of each province and city/per capita GDP of whole China.

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Table 1.2 Per capita GDP indices of the top five and the bottom five (1965)

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Top Five

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Table 1.1 Per capita GDP indices of the top five and the bottom five (1955)

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Table 1.3 Per capita GDP indices of the top five and the bottom five (1975) Top Five Beijing

Liaoning

Heilongjiang

Yunnan

Fujian

Henan

Sichuan

Guizhou

1723

926

856

554

410

169

168

166

156

109

636

342

316

205

151

62

62

61

58

40

Source: Chinese Statistical Bulletin. Note: Indices indicate per capita GDP of each province and city/per capita GDP of whole China.

Top Five

Per capita GDP (yuan) Indices

Bottom Five

Shanghai

Beijing

Tianjin

Liaoning

Zhejiang

Jiangxi

Henan

Yunnan

Guangxi

Guizhou

3836

2621

2183

1407

1061

592

576

483

467

418

453

309

258

166

125

70

68

57

55

49

Source: Chinese Statistical Bulletin. Note: Indices indicate per capita GDP of each province and city/per capita GDP of whole China.

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Table 1.4 Per capita GDP indices of the top five and the bottom five (1985)

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An Analysis of Determinants of Regional Disparities in China

Per capita GDP (yuan) Indices

Bottom Five

37

Tianjin

Zhejiang

Guangdong

Jiangxi

Shanxi

Tibet

Gansu

Guizhou

18923

11150

10284

8031

7870

2966

2847

2372

2270

1843

393

232

214

167

163

62

59

49

47

38

Source: Chinese Statistical Bulletin. Note: Indices indicate per capita GDP of each province and city/per capita GDP of whole China.

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Top Five

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Table 1.5 Per capita GDP indices of the top five and the bottom five (1995)

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We could analyze the following facts from Tables 1.1 to 1.5. (1) With regard to the three direct controlled municipalities under central government, i.e., Shanghai, Beijing and Tianjin, their per capita GDP of them constantly occupy top positions. However, since their characteristics as direct controlled municipalities under central government are different from other ordinary provinces and autonomous regions, this might be difficult to compare. (2) By breaking down the respective provinces and autonomous regions, it is clearly shown that, as far as the two provinces of Heilongjiang and Liaoning, which are the traditional industrial areas located in the Northeastern region, are concerned, their per capita GDP started to decline at the end of the 1980s. In the 1990s, their positions dropped from the top five, and their ranks were replaced by Zhejiang and Guangdong provinces. In particular, Guangdong province was ranked at the bottom five in 1965, but it raised to the top five rank in 1995. (3) The bottom five positions have been usually occupied by provinces in the Western region. Jiangxi and Henan, which are also located in Central region, have been relatively underdeveloped. Although Guangxi has been in the Eastern region, its rank was the second from the bottom in 1955 and 1965, before the reform and open door policy, and in 1985 after that policy.

2.2. Regional disparities among the three regions, East, Central and West in China In China, there has been traditional regional division, which is coastal and inland. For example, Mao Zedong insisted in the second relation of his Ten Big Relations in 1956, to relate coastal industries and inland industries.1 The inland is usually divided into Central and Western, in addition to the coastal region as Eastern, whose regional division also includes the three regions, East, Central and West. The three regions are divided by geographical location. However, the geographical advantages have been closely related with economic 1

Mao Zedong’s well-known speech at the enlarged conference of Central Political Bureau of Chinese Communist Party on April 25th, 1956.

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development. Since the modern era, the Eastern region has developed its economy due to the advantages of outward transportation, etc. After the founding of a country, as was shown in the “Third Front Construction (see Chapter 5, note 28, of this book)” the development strategy was attempted to take priority over inland regions. However, it did not yield good results as expected. Since the end of the 1970s, coastal regions have enjoyed economic development closely connected with foreign relations, meanwhile the Central and Western regions have been less developed than in the East. Table 1.6 and Figure 1.1 indicate the level and tendency of economic development in the three regions in terms of per capita GDP. We have selected four provinces, direct controlled municipalities under central government, autonomous regions from respective region, which are Shanghai, Liaoning, Zhejiang, and Guangdong in the East; Henan, Hubei, Jiangxi, and Heilongjiang in the Central; Yunnan, Sichuan, Shanxi, and Xinjiang in the West. As Table 1.6 and Figure 1.1 show, regardless of the particular region, the relative position of per capita GDP in most provinces, municipalities, and autonomous regions, has been stable. At the same time, a small number of provinces and autonomous regions show Table 1.6 Per capita GDP indices in the three regions

East

Central

West

Shanghai Liaoning Zhejiang Guangdong Henan Hubei Jiangxi Heilongjiang Yunnan Sichuan Shanxi Xinjiang

1978

1980

1985

1990

1995

6.60 1.79 0.88 0.97 0.61 0.88 0.73 — 0.59 0.67 0.77 0.84

5.94 1.76 1.03 1.03 0.69 0.93 0.74 1.40 0.58 0.72 0.73 0.91

4.53 1.66 1.25 1.15 0.68 0.94 0.70 1.24 0.57 0.70 0.71 0.97

3.63 1.67 1.31 1.43 0.67 0.93 0.69 1.24 0.75 0.68 0.70 1.10

3.93 1.44 1.67 1.64 0.69 0.86 0.62 1.13 0.63 0.66 0.59 1.04

Source: Chinese Statistical Bulletin, annual. Note: Indices indicate per capita GDP of each province and city/per capita GDP of whole China.

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East Shanghai(left) East Liaoning left) 7

1.6

6

1.4

East Zhejiang(left)

1.2

5

East Guangdong(left) Central Henan(left)

1

Central Hubei(left)

0.8

Central Jiangxi(right)

0.6 0.4

Central Heilongjiang(right) West Yunnan(right)

0.2

West Sichuan(right)

0

West Shanxi(right)

4 3 2 1 0 1978

Figure 1.1

1980

1985

1990

1995

West Xinjiang(right)

Per capita GDP indices in provinces and cities in the three regions

Source: Chinese Statistical Bulletin, annual. Note: Indices indicate per capita GDP of each province and city/per capita GDP of whole China. The left shows Shanghai, Liaoning, Zhejiang, Guangdong, Henan, and Hubei; and the right shows Jiangxi, Heilongjiang, Yunnan, Sichuan, and Shanxi.

great improvement, as shown by Zhejiang and Guangdong. Xinjiang has also experienced progress. However, in municipalities and cities such as Shanghai, Liaoning, Jiangxi, Shanxi, their relative positions dropped. With regard to Shanghai, the absolute value of per capita GDP index displayed was high. However, the decrease of index during 1978 and 1990 was remarkable. The relative position of Shanghai started to increase again from 1990. In the 1980s Shanghai was in its long depression as Table 1.7 shows. Chinese scholars have usually compared Shanghai, which was most developed, with Guizhou whose economy was least developed. However, as indicated in Table 1.7, the ratio of per capita GDP in Shanghai to per capita GDP in Guizhou was undoubtedly declining from 1975 to 1990. It seems to arise from the relative stagnation of Shanghai’s economy in the 1980s. Tables 1.1–1.5 clearly show that the index of Liaoning, which is located in the East and coastal regions and has been the base for

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Table 1.7 Per capita GDP disparities between Shanghai and Guizhou (1970–1995)

Per capita GDP, Shanghai (yuan) Per capita GDP, Guizhou (yuan) Disparity (yuan) Ratio

1970

1975

1980

1985

1990

1995

1336

1723

2720

3836

5894

18923

116

109

217

418

807

1846

1220 11.51

1614 15.80

2503 9.77

3418 9.18

5087 7.30

17077 10.25

Source: Chinese Statistical Bulletin, annual, and authors’ calculation.

state-owned heavy industries, decreased. However, Zhejiang and Guangdong, both also located in the East and coastal regions, have developed favorably. Meanwhile, the per capita GDP indices in provinces in Central and Western regions on the whole have been stable. Xinjiang and Yunnan in the West have shown relative progress; however, most other provinces in the region indicate stagnation and decrease. Based on the facts mentioned above, we could recognize that since the 1980s, the Eastern region which has enjoyed the most developed economy, has a variety of disparities inside. We could not help mentioning that each sub-region has experienced its own disparity in accordance with its own economic mechanism. Why has such disparity been brought about? In order to analyze reasons of disparities, we will investigate strategies on regional developments and characteristics of individual regions.

3. An Analysis on Determinants of Regional Disparities in China 3.1. Strategies and actual situations of regional development after founding of a country At the time when the new China was founded in 1949, regional development was extremely disproportionate. Seventy percent of industries

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and transportation facilities all over China was concentrated in Eastern coastal regions, which had only 12 percent in area. Huge areas except cities along the Yangtze River such as Wuhan and Chongqing had no modern industries. In order to change such a situation, new China attached greater importance to economic development in inland regions in the process of improving industrialization. The following items were included in development strategies to allocate proportionately to the regions. (1) First, the distribution of heavy industries and light industries centered in coastal big cities before new China was adjusted. (2) Second, investments in inland regions was increased and production bases were built with priority in inland regions. (3) Third, investments in heavy industries were given first preference. (4) Fourth, expansion of energy production led by hydraulic power was attempted. In the period of centrally-planned economy, huge investments were made in the Central and Western regions. Table 1.8 shows investment amounts of fundamental construction in the East, Central and West in each five year plan period in China. The characteristics of the First Five Year Plan was to attach greater importance to build industries in inland regions as well as to develop heavy industries with priority. During this period, 80 percent of 156 fundamental constructions assisted by the former Soviet Union were built in inland regions. Also, of the 694 important constructions with more amount than the investment criteria (including the 156 constructions by the former Soviet Union), Central and Western regions had 472 which shared 68 percent. Growth rate of the total amount of industrial production reached 18 percent, of which Eastern coastal regions shared 16.8 percent, and Central and Western regions 20.4 percent (Chinese National Planning Committee (ed.), 1996, p. 15). As concrete implementation measures during the First Five Year Plan of 1953–1957, the foothold development led by heavy industries in Northeastern inland regions was performed. The typical example was Northeast industrial base whose center was Anshan steel in Liaoning. Around the Anshan steel, construction of heavy industry production bases in cities such as Dalian, Jilin, Harbin, Qiqihar,

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Table 1.8 Investment amounts of fundamental construction in each region in each period (100 million yuan, percent) East

Central

West

Period

Investment Amount

Share

Investment Amount

Share

Investment Amount

Share

1953–1957 1958–1962 1963–1965 1966–1970 1971–1975 1976–1980 1981–1985 1986–1990 1991–1995

217.26 462.62 147.38 262.85 625.36 988.21 1626.98 3800.44 12473.96

36.9 38.4 34.9 26.9 35.5 42.2 47.7 51.7 54.2

169.43 409.75 137.83 290.67 527.34 705.95 997.46 1792.69 5535.64

28.8 34.0 32.7 29.8 29.9 30.1 29.3 24.4 23.5

106.14 265.86 107.94 340.54 432.00 565.64 587.71 1164.43 3467.94

18.0 22.0 25.6 34.9 24.5 19.9 17.2 15.8 14.7

Source: Chinese Statistical Office (1995).

Shenyang as well as Fushun coal mine, Yalujiang power plant, and Fengman power plant. Meanwhile, reforms such as industrial production in coastal regions of Shanghai, Jiangsu, Shandong, industrial production bases in Central China led by Wuhan, industrial production bases in Northern China led by Baotou, had gone ahead. In the Second Five Year Plan period, important points on inland regions of nation state building were more progressive prior to other regions. Fundamental construction investments in Central and Western regions shared more than half of whole China. After 1958, at the beginning of the Second Five Year Plan, in the Southwestern and Northwestern regions, industrial production bases were constructed, led by hydroelectric power generation and iron ore production. Also in Xinjiang, oil and mineral resources were developed, and production base constructions in areas such as Daqing oil field in Northeastern region and Panzhihua steel in Southwestern region were implemented. In the Northern region, the network of coal and steel industries centered in areas such as Beijing, Shanxi, Inner Mangolia, was planned. In the upstream of Yangtze River and Yellow River, big and medium sized hydroelectric power plants were established. However,

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during the period of the Second Five Year Plan, which started in 1958, foreign affairs deteriorated caused by, for example, worsened relations with Soviet Union, and development strategies placing more weight on war industry gradually leaped into prominence. In the period of economic adjustment (1963–1965), the central government strengthened its plan of adjusting national economy. It meant that a series of economic measures attaching more importance on economic efficiency were implemented by downsizing heavy industry investment and by adjusting irrational industrial structure. It restored the national economy. However, in the period of the Third Five Year Plan (1966–1970), the Chinese government proposed a plan to establish strategic “Big Behind” to meet the military demands. It indicated to divide whole China into three fronts, i.e., the first front, second front, and third front, in which importance of economic expansion was allocated to the third front. During the adjustment period of three years, the third front region shared 38.2 percent of overall Chinese fundamental construction investment. In the Third Five Year Plan period, the share increased to 52.7 percent, which was around two times more than the share of coastal region. The total fundamental construction investment in Central and Western regions had 63.7 percent of entire China’s investment concerned. In the period of the Fourth Five Year Plan (1971–1975), importance of the Third Front Construction was also emphasized. The policy tasks regarding the Third Front Construction were to provide military industrial system and to establish the strategic “Big Behind,” for which two policy measures were introduced. First was to allocate investment into the Third Front region with priority. Southwestern and Northwestern regions of the inland were prioritized for investment. Fundamental construction investment amount for the Third Front reached 69.098 billion yuan, which was 41.1 percent of the national total. Also, the fundamental construction investment amount in Central and Western regions became 95.834 billion yuan, whose share of the national total was 54.41 percent. As with newly started investments in inland regions, large scale movement from coastal industrial cities including existing equipment,

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R&D mechanism, manpower, engineers, and skilled labors was carried out. During 1964 and 1971, for example, the number of engineers and skilled labor moved inland from coastal region was 145,000, and the number of units of equipment reached around 38,000 (Maruyama, 1998).

3.2. An analysis on determinants of regional disparities 3.2.1. Development strategy with inland priority and regional disparities The regional development in China after its founding started with the priority to have a well-balanced development, which can be recognized from the allocation of fundamental construction investment. The inland development, the important substance of which was the Third Front Construction, however, did not yield the desired results. As the implemented results from the Third Front Construction indicated, especially in the Southwestern region, heavy industry and military industry production bases, as shown steel, machinery, electronics, aircraft, space rockets, etc., were established. Enterprises which assumed important roles in it were state-owned, therefore since the 1980s the traditional Third Front Construction regions have faced serious difficulties in the wave of market-oriented reform. As Tables 1.1–1.3 show, the growing results of inland regions before the reform and open door policy, per capita GDP index of Sichuan province, which was given great importance in the Third Front Construction, was still the second from the bottom as of 1975. It obviously pointed out the inefficiency of the Third Front Construction. In the system of central planning, the Third Front Construction led by state-owned and military oriented enterprises was in an extremely disadvantageous condition with regard to transportation because of security reasons. Although a variety of heavy industry production bases were constructed, they were rather enclaves isolated from other surrounding areas. The above-mentioned development was accompanied by serious stagnation in the agricultural

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sector of inland regions, which was also indicated to worsen the dual economic structure (Maruyama (ed.), 1993, pp. 275–315). The Third Front Construction could not transform the backwardness of inland regions before the reform and open door policy; it also caused, after the reform and open door policy, a new type of backwardness for inland regions, which meant the economic structure led by state-owned enterprises. We think that this has been one of the reasons of disparity between inland and coastal regions in China. 3.2.2. Development strategy with priority on state-owned heavy industries and regional disparities Lin Yanping considers that, in the second half of the 20th century, a crucial determinants of regional economic development and GDP level was the conditions of industrialization, and she examines industrialization level of each region (Lin Yanping, 2000). The industrialization index was as follows: Regional population in industry Regional population Industrialization index = Whole country population in industry Whole country population When the industrialization index is above 1, the industrialization level of the region concerned is more than the average industrialization level of the whole country. When the index is below 1, it shows the region’s industrialization level is less than the nationwide average of industrialization. For convenience, we classify each region into the following five types according to the industrialization index. A type means the region whose industrialization index is more than 2. B type shows the index is 1–2. C type is 0.8–1. D type is 0.6–0.8, and E type is less then 0.5. Tables 1.9 and 1.10 express industrialization level of China’s provinces, municipalities and autonomous regions, in 1985 and 1995 respectively.

1.98 1.83 1.73 1.35 1.27 1.25

Guangdong Hebei

1.09 1.01

Hubei Shanxi Shandong Jiangxi Qinghai Inner Mangolia Fujian Hunan

E

0.98 0.95 0.92 0.92 0.92 0.91

Ningxia Gansu Anhui Sichuan Henan Xinjiang

0.78 0.73 0.72 0.70 0.67 0.67

0.87 0.83

Guizhou Yunnan

0.63 0.51

Guangxi Hainan Tibet

0.42 0.41 0.25

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Source: Lin Yanping (2000).

Liaoning Zhejiang Jiangsu Heilongjiang Shanxi Jilin

D

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C

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A

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Table 1.9 Industrialization index in China’s regions (1985)

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2.81 2.34

Beijing Zhejiang Liaoning Jiangsu Guangdong Heilongjiang

1.83 1.70 1.65 1.52 1.48 1.21

Shanxi Hebei Jilin Shandong Jiangxi Hunan

1.20 1.16 1.13 1.11 1.09 1.01

Fujian Gansu Sichuan Hubei Henan Inner Mangolia Shanxi Anhui

D 0.99 0.98 0.94 0.87 0.86 0.83 0.82 0.81

Ningxia Qinghai Guizhou Xinjiang Guangxi

E 0.78 0.72 0.67 0.63 0.53

Yunnan Hainan Tibet

0.46 0.46 0.20

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Source: Lin Yanping (2000).

C

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B

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Table 1.10 Industrialization index in China’s regions (1995)

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When compared, the two Tables 1.9 and 1.10, with previous Tables 1.1–1.5, the bottom five provinces in 1985 dispersed around C type (two provinces), D type (two provinces), and E type (one province). Also in 1995, it showed further dispersion, which showed A type (one province), C type (two provinces), D type (one province), and E type (one province). It might therefore be difficult to insist that the industrialization index points out positive correlation with per capita GDP level. Tables 1.9 and 1.10 could not explain the phenomenon of per capita GDP index declining in Shanghai in the 1980s. We think that with the above findings, industrialization index has serious limits to explain disparities among regional economy in China and disparities among GDP growth rates. From viewpoints of industrial policy, the characteristics of development strategy in China after its founding was priority of the heavy industries, the main players of which were state-owned enterprises. The heavy industry priority strategy for development to strongly improve the very difficult economic situation after founding of the country is called the “enforced accumulation model” (Watanabe, 1996). Agriculture in the huge area of farm land was positioned as the origin of accumulation for investment for heavy industry development. Meanwhile, Nakagane insists that as the heavy industrialization led by state-owned enterprises in China in this period was mostly in self interest, huge amounts of investment into heavy industries had no positive effect on economic growth. According to his analysis, the main cause was institutional inefficiency (Nakagane, 1999). In other words, due to institutional inefficiency, induced and ripple effects which an uneven growth model expects had never come about. There is therefore a need to reform the central planning system. In a series of development strategy led by heavy industry priority, as it was previously said that in the inland regions, state-owned heavy industry production bases were established represented by the Third Front Construction, in coastal regions such as Northeast (Liaoning, Jilin, Heilongjiang), North China (Hebei, Shanxi), East China led by Shanghai, etc., also state-owned heavy industry production bases

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were constructed. In those regions with state-owned heavy industry production bases and other regions without them, they have had different development ways in the reform and open door policy period after the 1980s, which have influenced the changes in regional disparities. With the reform and open door policy after the 1980s, differences between traditional heavy industry regions led by state-owned sector in Shanghai and Northeast (Liaoning, Jilin, Heilongjiang) and open economic regions led by non-state-owned sector in South China (Guangdong, Fujian) and Jiangzhe (Jiangsu, Zhejiang) have become remarkable. For example, as shown in Table 1.11, at the beginning of the 1990s, annual average real GNP growth rate in Shanghai in 1991–1992 was 5.2 percent, which was lower than 6.2 percent of Jiangsu province, 9.9 percent of Zhejiang province, 14.3 percent of Guangdong province, 11.2 percent of Fujian province, 10.9 percent of Hainan province and 5.9 percent of national average in China. What were the main reasons for this? As Table 1.11 shows, with regard to the composition of industrial sector, the latter of the above had higher share of light industries while the former had a higher share of heavy industries. Regarding the industrial organization, the former of the above had a larger share of state-owned sectors and the latter had nonstate-owned sectors. In Shanghai in 1991, the share of light industries and of non-state-owned sectors to the total industry production showed 50.1 percent and 35.1 percent respectively, both of which were smaller than in Guangdong, Zhejiang, Jiangsu, etc. As far as economic reform process towards a market-oriented system is concerned, it is easier for regions in which there exist more market-oriented industries and industrial structures to introduce them. It seems that those differences have been closely related with regional disparities in economic growth rate. In other words, basic reasons for economic disparity at the present stage are the regional differences in the speed towards a marketoriented system like promotion of non-state-owned sectors, etc. It also means that China’s gradual reform in the 1980s had chosen the regional priority policy.2 2

For the detailed analysis, see Chen Yun (2001).

Light Industry (1991, percent)

Non-stateowned Enterprise (1991, percent)

558.6 337.4 960.6 430.1 320.8 1073.2 424.1 731.9 857.7 1452.6 983.5 600.2 557.8 461.3 1568.4

6.4 3.4 6.8 4.2 7.8 2.9 4.2 4.2 5.2 6.2 9.9 −0.2 11.2 6.4 8.8

2.8 3.9 3.5 1 0.7 11.5 1.5 2.3 11.4 5.9 4.6 1.3 4.6 1.2 7.1

44 48.4 47.5 25.2 40 30.9 39.9 32.2 50.1 53.2 65.2 51.3 62.7 44.5 51

40.1 42.9 52.1 38.9 22.6 39.7 28.5 18.9 35.1 67 70.5 42.9 59.3 37 60 (Continued )

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Share of Export to National Total (1990, percent)

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Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong

GNP (1991) (100 million yuan)

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Share of Total Industrial Production

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Table 1.11 Real GDP growth rate and economic structure (beginning of the 1990s)

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Table 1.11 (Continued ) Share of Total Industrial Production Non-stateowned Enterprise (1991, percent)

993.1 858.5 785.8 1780.6 453 107.9 1284.4 289.4 432.9 30.5 430.9 255.8 72.6 67.4 311.7 19855

5.7 3.5 5.9 14.3 9.8 10.9 5.7 7.1 7.6 5.3 7.6 6 4.2 4 11.6 5.9

1.7 2.1 1.6 22.8 1.5 1 2.3 0.3 1.2 0 1 0.4 0.1 0.1 0.6 100

45.4 46.8 44 65.7 53.9 67.1 46.5 42.2 29.4 29.7 42.1 27.2 29.2 26.7 49.5 48.9

46.8 36.8 37.2 61.4 28.8 28.9 37.4 23.6 56.7 15.6 31.5 21.9 16.1 21.1 21.3 47.1

Source: Chinese Statistical Bulletin, annual, Chinese Economic Bulletin Committee (1991) and Chinese Encyclopedia Editorial Committee (1991).

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Qinghai Hubei Hunan Guangdong Guangxi Hainan Sichuan Guizhou Yunnan Tibet Shanxi Gansu Qinghai Ningxia Xinjiang Total

GNP (1991) (100 million yuan)

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4. Concluding Remarks New China was founded in 1949, and after this its economy was developed based on state-owned heavy industry sector in a central planning system. This system was maintained for 30 years, until Deng Xiaoping started the reform and open door policy in 1978. After 1978, along with the market-oriented reforms, the coastal open strategy was implemented in the 1980s, which led to certain success. However, development strategy in the 1980s was limited to attracting foreign capital and to encouraging private enterprises, and the strategy delayed China’s full-scale reform of state-owned enterprises. In addition to the above, significant disparity between coastal and inland regions had been brought about, and within the Eastern coastal region, regional disparity was experienced. The non-state-owned sector regions like the Guangdong model, Jiangzhe model, and Wenzhou model enjoyed the economic expansion. However, state-owned sector regions like Shanghai suffered from disadvantages both in a systemic sense and in a political sense leading to regional stagnation. To overcome such problems in the 1990s, the omnidirectional open door strategy started by Shanghai Pudong Area Development was implemented. We could recognize with it that China seriously grappled with expansion of development regions, establishment of market-oriented systems, and handled efficiency problems of stateowned enterprises. It might be indispensable therefore that to adjust the disparity between coastal and inland regions, and within coastal regions, it is necessary to adjust the regional disparity in terms of economic development both in a systemic sense and in a policy sense.

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Chapter 2

A Comparative Analysis Between Postwar Japanese Economic Reforms and Polish Economic Reforms in the 1990s

1. Introduction When Japan surrendered to the Allied Forces in August 1945, the recovery of the Japanese economy began.1 It is usually said that the expected norm for the recovery period was 1934–1936, because this period was “the last peaceful and prosperous period before the war.”2 In comparison with the norm period, in 1946, Japanese real GNP was about 46 percent, private consumption was around 64 percent, and government expenditure was some 43 percent. According to statistics of the Ministry of Finance (1978), the estimated decrease of capital stock in 1945 from the wartime peak was about 25.4 percent, of which 24.6 percent of structures, and 80.6 percent of civilian ships, for example, were destroyed.3 In addition, wholesale price inflation (official) was recorded to be 364.5 percent in 1946, 195.9 percent in 1947, and 165.6 percent in 1948 (see Table 2.1).4 Actually, as is usually mentioned, “the country was in a state of complete destruction.”5

1

Hamada and Kasuya (1993) refer to General Douglas MacArthur’s well-known comment saying that the IQ of the Japanese was similar to that of a twelve year old (p. 156). 2 According to Teranishi (1993), during the period of 1934–1936, the real annual GNP growth rate was 5.6 percent and the GNP deflator was rising at an annual rate of 2.5 percent. The current account surplus to GNP ratio stood at 0.5 percent and the ratio of new openings to applicants at employment centers was 1.45, indicating near full employment conditions (p. 76). 3 Yoshikawa and Okazaki (1993), p. 86. 4 Fukao et al. (1993), p. 109. 5 Hamada and Kasuya (1993) op.cit., p. 155.

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Transition, Regional Development and Globalization Table 2.1 Main economic indicators (Japan) Real GNP Inflation Trade Growth Rate (WPI) Unemployment Gross Capital Balance (percent) (percent) Rate (percent) (1934–36 = 100) (US$ million)

1946 1947 1948 1949 1950 1951

— 8.6 12.7 2.1 11.0 13.0

364.5 195.9 165.6 63.3 18.2 38.8

4.0 1.1 0.7 1.0 1.2 1.1

120.4 124.8 129.9 135.0 139.8 145.4

−238 −267 −285 −195 −34 −291

Source: Bank of Japan (1966), Hamada and Kasuya (1993), Fukao et al. (1993), Ministry of Finance (1978), and Yonezawa (1993).

The Japanese economy, completely destroyed during World War II, started to grow rapidly in the 1950s. The purpose of this chapter is to investigate economic reforms and growth in Japan after World War II, while taking into consideration the economic reforms of post-socialist countries, focusing our attention on Polish economic reforms. Needless to say, differences in both domestic and international environments between postwar Japan and Poland in the 1990s were quite enormous. We should recognize, therefore, that application of postwar Japan’s experiences to the post-socialist Polish economic reforms were rather limited. Also, there have been many efforts in developing countries to follow postwar Japan’s method for achieving a high rate of economic growth. In addition, since the transformation process in post-socialist countries towards market-oriented economies, a great deal of attention has been paid to the postwar economic reforms in Japan. Particularly, it is a characteristic of the recent approach that many experts from various fields have tried to analyze the Japanese method of reforms. So far, we have a variety of incompatible views concerning the economic policies of World War II, such as the Priority Production System (a plan for intensively allocating resources to specific industries) and the Dodge Programme (a stabilization policy). In that sense, we should also recognize that it is not an easy task

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to examine the applicability of the Japanese experience to the postsocialist reforms. Therefore, in this chapter, our purpose is not to exhaustively examine the economic reform process, but rather is limited to focusing on a few essential factors in postwar Japan’s economic success, and comparing them with the Polish method of economic reform.

2. Postwar Japan’s Economic Growth As we do not think that much mention needs to be made about the high rate of economic growth in Japan after World War II, we would like to sum up here some essential factors of Japan’s economic growth along the lines mainly associated with Komiya (1975a, 1975b). This approach is taken because the Komiya’s assertions are considered to be major views about the topic herein concerned (although some of his discussions were originally presented to be counter-arguments against the then major views). Komiya’s assertions focused on the period of 1950–1960. For the purpose of this chapter, we indicate first some crucial factors for the economic growth in 1950–1960. Then, taking into consideration the factors, we extract the essential points of Japan’s reforms during the period 1946–1959, which seemed to lead to the era of high-speed economic growth. As is usually indicated, Japan’s average annual growth rate of real gross domestic product in 1950–1960 was 9.5 percent which was higher than other industrialized countries: i.e., West Germany, 7.7 percent; Italy, 6.0 percent; France, 4.2 percent; Canada, 3.7 percent; USA, 3.3 percent; and UK, 2.8 percent. As is well known, we have a fundamental equation among GNP growth rate, propensity to save and marginal capital coefficient which means that the higher the propensity to save and the lower the marginal capital coefficient, the higher the GNP growth rate. The ratio of gross domestic saving to GNP of industrialized countries in 1950–1960 was as follows: Japan, 29.9 percent; West Germany, 26.0 percent; Italy, 20.5 percent; France, 18.4 percent; Canada, 22.5 percent; USA, 18.3 percent; and UK, 15.5 percent. In the case of the ratio of a gross

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domestic investment to GNP in 1950–1960, we have the same order: Japan, 28.9 percent; West Germany, 23.8 percent; Italy, 21.0 percent; France, 18.4 percent; Canada, 24.4 percent; USA, 17.6 percent; and UK, 15.7 percent. There are some explanations about postwar Japan’s low value of marginal capital coefficient. As regards the period 1950–1960, crucial factors are considered to be (1) labor intensive industries had a major share of overall industries, and (2) postwar labor conversion from the military sector and excess labor in rural areas made prices of labor relatively cheaper. There are also a variety of explanations about the active investment demands in the same period. We recognize three factors as indicated here. First, Japan had an increase in imports of technology from foreign countries and increase in private plant and equipment investments, and second, market structures in postwar Japan were competitive, and third, income distribution became more equal and contributed to the expansion of the domestic market. Needless to say, the financing of the active investment demand had to be supplied from savings. As for postwar Japan, investment demand was financed by domestic savings, not by importing foreign funds. Why in postwar Japan did people save so much? In 1950–1960, of the overall domestic saving in Japan, private saving, depreciation allowances, government net saving and corporation net saving each held shares of 37 percent, 26 percent, 21 percent and 16 percent respectively. Private saving played the major role. In comparison with other industrialized countries in the same period, the ratio of government net saving and corporation net saving to GNP were not higher, and the ratio of depreciation allowances to GNP was rather lower. However, the ratio of private saving was much higher, being 10.9 percent compared with West Germany, 8.7 percent; Canada, 5.2 percent; France, 4.3 percent; USA, 5.2 percent; and UK, 1.9 percent. Therefore, private saving should be recognized as the main source of funding. The high propensity to save led to posptwar Japan’s high rate of economic growth. Plausible explanation of Japan’s higher rate

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of private saving to GNP than in other industrialized countries, if focusing on the period until 1960, was undoubtedly the very high propensity to save of the unincorporated business sector. Although the exact figure of their propensity to save varies from different estimates, the rough figure shows that, in 1955 for example, the ratio of saving in the unincorporated business sector was 25 percent before tax income (agricultural sector’s ratio was 10 percent and employee sector’s was 8 percent). The above-mentioned extremely high propensity to save in the unincorporated business sector raised the ratio of private savings and made the rate of net domestic savings high. It is not easy to simply explain the unincorporated business sector’s high propensity to save, but we could undoubtedly point to a few of the major reasons. Actually, about 38 percent of the unincorporated business sector’s savings was accumulated as equipment investment for their own businesses. Also, as the ratio of their transient income to overall income was higher than that for employees, they seemed to save money for precautionary purposes. We can conclude the above discussion along lines mainly associated with Komiya (1975a, 1975b) as follows: From the various characteristics of postwar Japan’s economic growth in 1950–1960, the following three are indicated as important factors, namely (1) competitive market structure, (2) high propensity to save unincorporated business sector, and (3) more equal distribution of assets and income in postwar Japan.

3. Postwar Japan’s Economic Reforms It is plausible to recognize that there are some links between postwar economic growth in 1950–1960 and the postwar economic reforms in 1946–1950, although it is rather difficult to exactly evaluate the degree of relationship. As for the above three factors, competitive market structure was mainly related to anti-trust policy; the unincorporated business sector’s high propensity to save was connected with differences between official prices and (black) market prices in the process of postwar Japan seemed to be related to the depreciating

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monetary assets, blocked deposits and agricultural land reform through inflation.6 Competitive market structure has been one of the most important factors for the extremely high rate of economic growth in postwar Japan. Needless to say, anti-trust has been a policy for making market structure more competitive. However, as a matter of fact, it is not an easy task to scientifically recognize a relationship between the existence of a competitive market structure and the existence of an antitrust policy. This means that it is rather difficult to insist that, in postwar Japan, if an anti-trust policy had not existed, the market structure would have been less competitive. This discussion is considered to be important for post-socialist countries because neither the argument that well regulated anti-trust policy automatically creates a competitive market structure nor the argument that market structure cannot become competitive with a well-regulated anti-trust policy, are correct.7 Crucial factors for creating a competitive market structure are

6

A major reason for increasing the ratio of unincorporated business sector’s income to overall GNP and for increase of per capita income came, as Yoshikawa and Okazaki (1993) indicated, from differences between official prices and (black) market prices (see Teranishi (1993, pp. 68–70)) for a comparison of market prices to official prices. The differences could give unincorporated business rent. In addition, we could say, because of this rent, it was possible to maintain entrepreneurship and to accumulate capital for postwar Japan’s economic expansion. However, we should quickly comment on the other hand, that, if the rent had been much higher and had lasted longer, then income distribution would have been rather more unequal and overall economic efficiency would have been much lower. Particularly in years when a war is finished or when a system is drastically changed, more unequal distribution of income and assets undoubtedly makes the socio-economic situation more confusing. In order to avoid diverging people’s expectation from estimated long-term equilibrium, the postwar Japanese government had a policy under which the relative prices were anchored to the 1934–1936 relative price structure, with four large-scale revisions (“The March 1946 revision set the multiplicant at eight which was revised up to 65 in July 1947 and 110 in the June 1948 revision”). The adjustment of the multiplicant was used as an attempt to control the differences between official prices and (black) market prices so that the two did not diverge. See Teranishi (op. cit. pp. 75–77). Yoshikawa and Okazaki (1993) have done pioneering work to indicate the importance of the impact of income distribution in postwar Japan’s economic reforms. Although, at present, it is not easy to carefully examine, an issue concerning privatization in Poland is connected to the aspect of income and assets distribution in the economic reforms. See, for example, Gajdeczka (1993). 7 Miwa (1993) carefully examined the issue herein concerned.

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enough entrepreneurship and enough finance for new entrants to the market. Both the high ratio of unincorporated business sector income to GNP and the more equal distribution of income and assets undoubtedly came from postwar Japan’s economic reforms. By focusing attention on postwar Japan’s economic reform policies such as the Priority Production System and the Dodge Programme and on several economic indicators such as trade and inflation, it is often said that Japan’s reforms are considered to be less radical than the Polish economic reform processes, known as the Balcerowicz Programme. However, some reforms, like the blocked deposit and agricultural land reform are closely related with income distribution led by General Headquarters of the Supreme Commanders for the Allied Powers (hereafter, GHQ), were extremely drastic in comparison with the Balcerowicz Programme. And, the more equalized direction of income distribution through the drastic reforms undoubtedly became “the base for subsequent high rate of economic growth without hard social disorder.”8 The radical reforms led by GHQ in postwar Japan should be correctly recognized when Japanese reform is compared with the reforms of post-socialist countries. It is easily shown, using a few simple pieces of data, that the agricultural land reform and blocked deposits in Japan were very drastic. The agricultural land reform in Japan could be defined as “the redistribution of land ownership rights from landlords to tillers.”9 It was approved in the Diet on 11 October 1946, but was actually decided upon by GHQ. Through this five years long policy, the share of tenanted land to total farmland drastically decreased from 46 percent in 1941 to 13 percent in 1949. Under the process of redistribution, the government during a period of high inflation acquired agricultural land from landowners and sold this land to cultivators at the 1945 price level. Needless to say, the actual value of the land

8

Mizoguchi (1993), p. 157. Mizoguchi investigated more equalized direction of income distribution in postwar Japan being 0.3 level of the Gini coefficient than in prewar Japan being 0.4 level of the Gini coefficient. 9 Kawagoe (1993a), p. 190.

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dramatically decreased. It was said that “In 1939 the price of 1 ton (= 0.099 hectare) of good paddy land was equivalent to over 3,000 packs of cigarettes or 31 tons of coal. In 1948, however, it was equivalent to only 13 packs of cigarettes or 0.24 tons of coal.”10 Such reduction in the burden of tenants, brought about through inflation, undoubtedly made a more equal income and assets distribution.11 The blocked deposit was a policy implemented from March 1946 to July 1948. The policy required that (1) all Bank of Japan notes above a certain denomination be deposited and that (2) withdrawals of deposits was forbidden except for the minimum needs of living and production activity. During this policy, currency in circulation decreased from 55.6 billion yen in February 1946 to 24.6 billion yen in March 1946; and, currency and deposits not blocked decreased from 222 billion yen in February 1946 to 65.2 billion yen. However, currency and deposits not blocked easily returned to about their former level in about half to one year (currency in circulation increased to 65.8 billion yen in September 1946, and currency and deposits not blocked increased to 207.2 billion yen in March 1947). Therefore, it is evaluated that the policy could not force inflation to disappear, but “deposit freezing postponed the explosion of inflation by six months.”12 A more important effect of the policy was, however, to bring about a very big redistribution of income and assets. Because of the high rate of inflation under the policy, the real value of the deposits decreased to less than one-quarter and through the big fall in value of prewar monetary assets, income and assets were redistributed.13 We could insist that, through policy measures like postwar inflation and agricultural land reform, the distribution structure of GNP 10

Kawagoe (1993a) op. cit., p. 195. However, Kawagoe (1993b) correctly mentioned, from a viewpoint of industrial policy, “the reform did not change the basic structure of agricultural production” (p. 372). This means that the agricultural land reform indicated here could not establish a long-term base for more efficient agricultural production. Interestingly enough, Sachs’ (1994) expectation of the Polish agricultural policy is that “many small farmer households will sell their farms in the coming decade or two, so that farmlands will be consolidated over time into a much smaller number of larger farms” (p. 209). 12 Ministry of Finance (Japan) (1978), p. 164, and also see Teranishi (1993) op. cit., p. 71. 13 Yoshikawa and Okazaki (1993) op. cit. 11

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changed in a more equalized direction and this contributed to the base for the high rate of economic growth brought about through postwar Japan’s capital accumulation, which came from the high propensity to save and expansion of the domestic market. As mentioned before, more equalized income distribution needed the extremely drastic systemic reforms led by GHQ. Thus, we should correctly recognize that postwar Japan’s economic reforms were very drastic. At the same time, however, in comparison with the current postcommunist Polish reforms, Japan’s real GNP growth rate recorded 8.6 percent in 1947 and 12.7 percent in 1948 (Table 2.1). Even before the Dodge Programme (whose aim was to eliminate excess money supply) started in 1949, the inflation rate was already fairly stabilized in 1948. This means that, from the viewpoint of stabilization policies, the need for the Dodge Programme to shock the economy into making the market mechanism work in Japan might be less than the need for the Polish Balcerowicz Programme. This lesser need results partly from the other drastic systemic reform mentioned above. Next, we focus on the industrial policy in postwar Japan. This has been, for the last several years, one of the most highlighted issues. Up to the present time, however, we had a variety of discussions concentrating on the effects of the policy. This is so because it is rather difficult to evaluate the efficiency of a policy; more so to provide an overall evaluation. Therefore, we would like to select the automobile industry to briefly examine a case involving Japanese industrial policy because the passenger car industry experienced tremendous development. This is a useful illustration. Based on a decision in a cabinet meeting on policy for industrial rationalization in September 1949, Japan experienced protection for its passenger car industry for 20 years. The economic performance of the Japanese passenger car industry for the 20 years between 1951 and 1971 was remarkable. The industry produced only 3,600 passenger cars in 1951 but expanded to produce 3,718,000 passenger cars in 1971. In terms of the number of passenger cars produced per worker, there was remarkable growth in labor productivity from 0.5 cars in 1955 to 10.1 cars in 1971.

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The impact of MITI’s industrial policy since World War II on this remarkable development of the Japanese passenger car industry has generally received a low evaluation. This seems quite rational to the authors of this book. The main reasons for a low evaluation can be summarized by the following two points: (1) There was no clear ground for having an intervention policy for particular industries. The criteria for choosing industries for protection were (i) high income elasticity of demand, and (ii) high growth rate of productivity. However, as is correctly mentioned, “industries satisfying the above two criteria can develop without any government intervention,” and “the government seemed to have no intention to protect and develop industries like tourism, supermarkets, restaurant, etc. that completely satisfy the above two criteria.”14 It is very difficult to find from the postwar Japanese experiences rational reasons for protecting particular industries in order to help them to develop. (2) The MITI plan for an industrial structure to make a strong passenger car industry was not realized. MITI planned to make their intervention with the “National Car Plan” in 1955 (to develop only one company producing exportable, low priced small sized cars) and the “Grouping Plan” in 1961 (to restructuring passenger car companies into three groups). However, their plans were not realized because of strong opposition from the Japan Association of Automobile Industry, which comprised automobile companies. Although protection policies functioned to allocate the domestic market to domestic suppliers and not overseas suppliers, a crucial reason for the remarkable development in the Japanese passenger car industry is considered to be the keen competition among domestic producers to expand their shares in the domestic market, closely connected with, first, the high rate of economic growth in macroeconomic performance and, second, high income and price elasticity of demand, which were independent of the government’s industrial policy.15 Through the discussion in this section, we can conclude as follows: (1) because of the drastic systemic reforms, income and assets 14 15

Komiya (1984), p. 8. Morita (1992) investigated the topic. Also see Morita (1993a).

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distribution became more equal and the propensity to save by the unincorporated business sector became high. (2) Regarding postwar Japanese industrial policy, although it is difficult to provide an overall evaluation, it is not easy to assert that the industrial policy had a major impact on the industrial development of postwar Japan.16 A crucial reason for postwar Japan’s industrial expansion is considered to be keen competition among domestic producers.

4. Comparative Analysis with Polish Economic Reforms As is well known, Polish economic reforms started in January 1990 with four key goals. They are: (1) the slowdown of inflation, (2) the eradication of shortages, (3) the restoration of a proper role of the national currency, and (4) the beginning of the processes of structural and ownership transformation. From January to March 1990 (this three-month period is called “Phase one”), a “50 percent decrease of the money stock in real terms took place.” “This led, already after the first quarter of the year, to the appearance of excess supply and the development, for the first time in 45 years, of a buyer’s market.” The monetary authority assessed the situation to be “a much deeper than assumed recession.”17 To be sure, the Polish “shock therapy” has generally been considered as the cause for putting its economy in a rather deep recession since 1990.18 Why has the Polish economy been in deep recession? This has been one of the hottest issues which economists have discussed — both from the demand-side and the supply-side.19 In this chapter, we would like to approach the issue only from the viewpoint of comparing the Polish experience with the postwar Japanese experience. However, it is rather difficult to scientifically evaluate whether comparing the Polish system of economic reforms with the Japanese experience is correct. 16

See Morita and Yoshino (1993). However, the Japanese government’s role of financial assistance for the overall industrial expansion should be correctly evaluated. 17 National Bank of Poland (1990), p. 7. 18 According to official statistics, in 1992 and 1993, the Polish economy did not and will not experience a negative real GNP growth rate. Although in this chapter we do not examine the issue, there are serious questions about confidence in these statistics. 19 See, for example, Poznanski (ed.) (1993).

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Focusing our attention on the postwar Japanese economic performance, we can easily recognize a few differences between the two cases. In postwar Japan, real GNP growth rate was positive, and domestic capital formation was, generally, positive. At the same time the unemployment rate was not high. In Poland, however, real GNP growth rate and domestic capital formation were both negative by about 10 percent, and the unemployment rate was increasing so as to be more than 10 percent. On the other hand, in postwar Japan, there were higher rates of inflation (as was mentioned before) in the wholesale price index than in Poland. These rates existed for a longer period (365 percent–166 percent in 1946–1948 and 63.3 percent in 1949)20 and the trade balance deficit was huge (however, because of positive net transfer, current balance was in surplus) and lasted a long time. In Poland, the annual inflation rate in 1992 was reduced to 44.3 percent (although it had been 584.7 percent in 1990), and the trade balance has been in about equilibrium, or at least not in a huge deficit,21 (see Tables 2.1 and 2.2).

Table 2.2 Main economic indicators (Poland)

Real GNP Inflation Growth Rate (WPI) (percent) (percent) 1990 1991 1992

−11.6 −7.0 0.5–2.0

585.8 70.3 44.3

Unemployment Rate (percent)

Investment (annual growth rate)

Trade Balance (in convertible currency) (US$ million)

6.1 11.5 13.6

−10.0 −4.0 −1.0

2,214 51 —

Source: World Economy Research Institute (1992, 1993b).

20

Through the period of high inflation, personal saving in postwar Japan was quite small until 1950. However, provisions for capital consumption, undistributed corporate surplus and government current surplus were rather large so as to make the ratio of overall saving to GNP 25–20 percent in the 1940s. See Hamada and Kasuya (1993). 21 World Economy Research Institute (1993a) mentioned that “According to National Bank of Poland (NBP) data derived from the balance of payments, Poland had a trade surplus of US$512 million in 1992. According to the Central Statistical Office (GUS) based on customs returns, it had a deficit of US$2.5 billion” (p. 116).

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As was mentioned previously, income distribuion, in postwar Japan, generally moved in a more equal direction, while in Poland income distribution appears to be more unequal. According to the World Economy Research Institute (1993a), we find the important information that “In general terms the number of social groups who may be deemed losers far exceeded the number of gainers.” The main losing groups have been employees of state-owned enterprises and the so-called budgetary sphere (except civil servants in central administration, justice and defence). By contrast, those who gained have comprised, in the most general terms, the non-agricultural private sector (especially joint-venture companies, subsidiaries and branches of foreign firms), as is basically indicated in Tables 2.3, 2.4 and 2.5.23

Table 2.3 Distribution of national income (Japan) 1934–1936

1946

1947

1948

1949

1959

100.0

100.0

100.0

100.0

100.0

100.0

Compensation employees

39.3

31.8

33.2

29.2

43.5

42.6

Incomes of owners of unincorporated enterprises Agriculture Manufacturing Commerce

32.4

64.0

65.1

54.5

47.4

45.9

14.5 3.8 8.3

28.6 8.8 9.3

26.8 11.8 12.9

23.1 10.2 11.4

20.8 9.5 9.1

19.1 12.2 4.8

Rent Farm rent

10.3 4.4

1.1 0.3

0.8 0.2

0.7 0.1

0.7 0.1

0.8 0.1

Interest

6.9

2.0

0.9

0.8

1.1

1.4

Corporate reserve

8.3

1.0

1.0

2.4

5.1

9.1

Total

Source: Economic Deliberation Agency (1953), Yoshikawa and Okazaki (1993).

22

World Economy Research Institute (1993), p. 15. World Economy Research Institute (1993), p.13. Also see, for example, Bozyk (1992) and Iwata (1993). 23

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Total incomes of which: Wages Social security payments Incomes of private peasants Incomes of private sector (non-agricultural)

1990

1991

76.9 70.2 83.4 47.4 107.4

103.0 91.6 126.2 60.7 101.0

Source: World Economy Research Institute (1993a).

Table 2.5 Changes in the composition of household incomes in Poland (percent shares in total incomes)

Wages Social security payments Other transfer payments Borrowings Incomes of private peasants Incomes of non-agricultural private sector Other incomes

Dec. 1989

Dec. 1990

1991

41.2 19.9 3.7 5.1 8.1 14.0 8.1

34.5 19.1 2.5 7.9 4.8 16.4 14.8

32.4 21.7 4.2 11.2 4.8 14.8 10.9

Source: World Economy Research Institute (1993a).

From the above simple macroeconomic statistics concerning the two countries, our diagnosis on the Polish recession is considered to be more compatible with the demand-side assertion. The diagnosis could be mentioned, for example, along with Dornbusch et al. (1991), roughly as follows: First, the important role of monopoly power24 which mainly explains the increase of prices. In addition, the real wages have decreased due to the exercise of monopoly power. “It represents a shift in income distribution from labor income to profit income. If the marginal propensity to spend out of profit is less than that out of labor income, it is 24 A problem regarding the monopolistic market structure in Polish economic reforms was emphasized before the Balcerowicz programme. See, for example, Bozyk (1988).

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Table 2.6 Percentage of Polish firms perceiving their domestic market as being in excess demand

Excess demand Balanced Excess supply

October 1988

February 1990

48 38 13

3 28 69

Source: Institute of Finance (Poland) (cited from Dornbusch et al., 1991, p. 20).

likely to decrease aggregate demand and output.” Second, the main factor of the recession has been recognized to be demand rather than supply (Table 2.6).25 And “part of the decrease in consumption behavior comes from the adverse shift in income distribution; part of it comes also from uncertainty as to what the future may hold.”26 To sum up, we can recognize that in the process of the Polish shock therapy, due to price liberalization under a monopolistic market structure, real wages have decreased and income distribution has adversely shifted. As a result, aggregate demand has decreased and the Polish economy has been in a deep recession. We suppose that it is not risky to insist that the story roughly sketched above is what happened in Poland in 1990–1991. To date, the economic performance brought about through the shock therapy in Poland seems to be just the opposite from the case of postwar Japan. Competitive market structure and more equal income distribution are considered to be basic factors for postwar Japan’s

25

It is mentioned that postwar Japan’s economic reforms were characterized by the prepondence of supply-side policies (see, Teranishi and Kousai, 1993, p. 16) and the then postwar Japan’s still destroyed economic situation was considered to be coming from supply-shortage (see Yoshikawa and Okazaki, 1993). The reason for positive annual real GNP growth rate in postwar Japan seems to be, however, another problem. 26 Dornbusch et al. (1991), pp. 19–20. Needless to say, as is often insisted, the Polish recession has also come from another demand-shock namely, the reduction of the former Soviet imports related to the collapse of the CMEA. Concerning the related issues, see, for example, Brada and King (1993), and Rosati (1993).

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economic growth, and the remarkable difference between postwar Japan and the Polish performance in 1990–1991.27

5. Conclusion In comparing postwar Japan’s economic reforms and economic growth with Polish economic performance in the beginning of the 1990s, the differences in (1) market structure and (2) income distribution, are remarkable. We suppose that in postwar Japan, because of a competitive market structure and more equal income distribution, the domestic market expanded and the propensity to save became high. In contrast, we recognize in Poland in the 1990s a market structure which was monopolistic, income distribution which was more unequal and the domestic market decreased. From the experience of postwar Japan, crucial factors for successful economic reforms in Poland seem to be: (1) establishing many small and medium-sized private firms with entrepreneurship, (2) making the market structure competitive, and (3) making propensity to save and investment higher through more equal income and assets distribution.

27 As for industrial policy, we think the most important device for Poland to presently institute is greater deregulation to create a more competitive market structure, and avoidance of protectionist policies.

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Chapter 3

Key Industries and Development of Industrial Policies in Shanghai since the 1990s

1. Introduction: Two Tasks of Shanghai in the 21st Century Shanghai municipality is located next to north and south of Jiangsu province and Zhejiang province, and is between the mouth of the Yangtze River in north and Hangzhou Bay in south. It is also on the alluvial plain of the Yangtze River Delta stretching out into East China Sea. Chongming Island, located at the mouth of Yangtze River, that is a county of Shanghai municipality, is the third largest island in China, which was formed by alluvial soil from the Yangtze River and is still growing. Shanghai municipality is around four meters in average above sea level. It is 6,340.5 square kilometers in area and occupies 0.06 percent of China, of which rivers and lakes cover 532 square kilometers in area. The longest East-West distance was measured to be around 100 kilometers, and the longest North-South distance around 120 kilometers. Administrative divisions have 18 districts and one county. The population in Shanghai reached 17,169 thousand in 2003 (including population without household register), of which population with household register was 13,418 thousand. While the natural growth rate of household register population has been below zero since 1993, total population has increased by 0.8 percent annual growth rate since 1979 because of increased population inflow in Shanghai from other area. Non-agricultural population at the end of 2002 was 10,188 thousand which comprised 76 percent. The average life expectancy of these people was 79.52. 71

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Since the 21st century, Shanghai has been confronted with two serious tasks. First, in its process toward the international city, taking into consideration the fact that big cities all over the world have had the tertiary sector centered industrial structure, Shanghai has established its city function as “the center of international economy, trade and finance” with the development strategy in industrial structure to be “3, 2, 1.” Through the 1990s, however, industrial development in Shanghai was especially remarkable and contributed to GDP growth more than other sectors in which, for example, the tertiary sector was damaged by the slump of the stock market. What should we recognize with regard to the gap between the target and reality? The second task is as follows. In the Yangtze River Delta, in the 1980s, the Jiangzhe model and in the 1990s, the Shanghai model were in place, which had different characteristics. Since the second half of the 1990s, it has been recognized that the opportunity when the above two model areas should be comprehensively planned had arrived. Such regional integrations as in Yangtze River Delta and in Pearl River Delta have recently received attention in China. Economic relations between Shanghai and cities around it in particular have attracted considerable attention. The second task is the way towards a vertical division of labor of which Shanghai reaches the peak could be built, in order for the whole region to develop by reducing losses like redundant construction. The above first task questions which relations should be between industrial structure and city function in the growing process towards an international city. The second task questions how the core city of a particular region could maintain its position. The two tasks Shanghai has faced could be summarized as which way Shanghai is able to grow to an international city. Cities could be brought up, growing and maturing as human beings, which basically depend upon industrialization and structural advancement of the cities. We would focus our attention on industries in Shanghai in the 1990s, in order to analyze its development tasks and policy measures.

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2. Chinese Economy in the 1980s: The Characteristics, Limits and Tasks of Regional Development 2.1. Growing industries, growing regions and their reasons of the 1980s China Under the coastal opening strategies which began with implementation of agricultural contract system and development of TVEs (Town and Village Enterprises), etc., growing industries were labor intensive, and growing regions in the 1980s were the Guangdong Model and the Jiangzhe Model. The Guangdong Model was indicated as a foreign capital-led growth model, which showed the biggest share of export from Guangdong province in 1991 of whole China, 22.8 percent.1 The Jiangzhe Model, on the other hand, expanded depending on rural area industrialization based on TVEs, even with its redundant population. The Jiangzhe Model also had its characteristics to be domestic oriented both in market and capital. Since China’s reform in 1978 and until 1992 the highest income growth rate was occupied by Zhejiang province, which was followed by Guangdong province, Fujian province, Jiangsu province and Shandong province. On the contrary, municipalities, cities and provinces such as Shanghai, Beijing, Tianjin, Liaoning and Hebei, which are located in coastal regions and have intensively had state-owned enterprises, fell 1

See for example Wu (1995a, 1995b), in which the shortcomings of the “Guangdong Model” compared with the “Jiangzhe Model” were indicated. The main viewpoints were as follows. The regional priority policy (which means that central government’s advantageous policies are intensively implemented with particular priority for specific regions) has promoted the “Guangdong Model.” Its model has attracted huge amount of foreign capital into the region concerned due to the advantageous policies, which has undoubtedly led the high rate of economic growth. It automatically pointed out that other regions had a disadvantageous position compared with particular advantageous regions for development. Consequently, excessive competition for advantageous policies appeared among local governments. The development areas boom at the end of 1992 was its concrete example. Also, their main activity was processing trade and the obligation connected with advantageous policies was that at least 70 percent of the products had to be exported. South China region, in which the “Guangdong Model” is located, has been more linked with international economy, and less linked with domestic economy. Also as their activities have been limited to simple processing trade with low level technology, it has been criticized that the “Guangdong Model” performance has never contributed for improvement of Chinese economic structure.

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in their income growth rate ranks, Shanghai from 2nd to 17th, Beijing from 1st to 21st, Tianjin from 3rd to 20th, Liaoning from 4th to 19th (see Watanabe, 1995). Each municipality and province like Shanghai, Beijing, Tianjin, Liaoning, and Hebei fulfilled important roles for China’s national economy as traditional industrial bases for 30 years after the founding of the nation (till the reform and open door policy period). After the reform and open door policy, however, state-owned enterprises still occupied the crucial role of their economy, which became a burden to the growth of their regional economy. Regarding the industrial structure, Jiangzhe and South China occupy a higher ratio in light industries, and Shanghai and Northeast China a higher ratio in heavy industries. As far as the non-state-owned sector is concerned, in Jiangzhe and South China, it has a higher ratio; however, in Shanghai and Northeast China it is lower. In Shanghai in 1991, for example, the ratio of light industries and non-state-owned sector of industrial production was 50.1 percent and 35.1 percent respectively, each of which was lower than in Guangdong, Zhejiang, Jiangsu, etc. The ratio of non-state-owned sector production in Zhejiang province and Jiangsu province in particular reached 70 percent, which was higher than not only in Shanghai, but also in Guangdong province and Fujian province called the Guangdong Model (see Chen and Toda, 2001). We could say that the economic reform process towards a marketoriented system is easily introduced in regions which have more light industries and more non-state-owned sectors. It could be said that the above differences were reasons of regional disparities in economic growth rates.

2.2. Summary of Section One Regions in China are often classified as Eastern, Central, and Western, or as coastal and inland. However, in China, which has changed on an extremely radical scale, such classification has never reflected reality because there have been earthshaking changes within each region. It can be said, based on the above, that newly growing cores have appeared through their competition. The deep rooted reasons for growth of the Guangdong and Jiangzhe models and in relative stagnation of Shanghai, etc., can be pointed out as follows.

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In China in the 1980s, state-owned enterprises reform was in the beginning stage and was never in full scale. In place of the full scale reform, the Chinese government used measures such as Special Economic Zones and Special Development Zones, for foreign-owned enterprises and private-owned enterprises to do active business. The government measures have caused the Guangdong Model to be led by foreign capital and the Jiangzhe Model to be led by TVEs. In traditional Chinese economy, however, many state-owned enterprises have been crucial players. It can be said that for nation wide balanced growth through giving a chance for recovery for stateowned industrial bases like Shanghai, Northeast and inlands, full scale reform of state-owned enterprises has been indispensable. In order to solve the task, a Shanghai model was created in the 1990s.

3. Key Industry and Development of Industrial Policies in Shanghai 3.1. Re-establishment towards goals in the city function As a result of coastal open strategy, regions such as South China, Zhejiang province, Jiangsu province, etc. were closing the gap with Shanghai, which has fallen behind the wave for market-oriented system. Shanghai was as a matter of fact behind the leading region in establishment of city infrastructures like roads, housing, electric power, water supply, etc. Shanghai in the 1980s, thus, was in a serious situation below the national average in industrial growth rate. In the 1990s due to geographical advantage, historical credits, etc. Shanghai was once again paid attention. In the Pudong area development, a development strategy for Shanghai, the Yangtze River Delta and provinces in the Yangtze River valley was included, which says that “Shanghai should be a core city for international economy, international trade and international finance, by which the Yangtze River Delta and whole region of the Yangtze River valley would have a new development.”2 Recently in addition to the above, another goal which is 2

According to the speech by the secretary general Jiang Zemin at the 14th Chinese Communist Party Meeting in 1992.

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international distribution center was set. Shanghai has proceeded with the four centers. While proceeding with the strategic goals, whole industries in Shanghai have become targets for economic reform, not only traditional industries which have been the industrial core for traditional Shanghai. Key industries and industrial policy for Shanghai to bring up in the 1990s were expressed as “Shanghai New Industrial Upland Building” (building project of more advanced industry base than around area). It could be classified as reforming and adjusting “traditional industries,” and as choosing and promoting “key industries for Shanghai” (of leading industry based on heavy industry), “Shanghai High-Tech industries” and “urban type industries for Shanghai.”

3.2. Reforming and adjusting traditional industries The main industries in Shanghai in the 1980s, were called the “eight major industries” like the spinning industry, light industry, and machine tools for measuring instrument industry. Since the 1990s, these industries have been reformed, whose aim were the following: (1) Producing goods with extremely outdated technology have been prohibited. This was mainly against the “Shi Wu Xiao” enterprises meaning industries such as paper and pulp, dyeing, leather and synthetic leather, chemical fertilizer, brick, materials for construction, cement and cement products, casting, non-ferrous metals metallurgy, government employed measures of regulation and closing down. At the end of 1997, 97 enterprises including the above were all shut down. (2) Measures against declining industries were employed. The typical example was the spinning industry, in which the production volume was reduced by 1,500 thousand pieces. Regarding light industries, production volume of goods which were in lower technology decreased. As far as metallurgical and chemical industries were concerned, outdated technology was cut back on the one hand, and development of new products were positively encouraged on the other.

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(3) They moved enterprises of environmental pollution from city area. At the end of the 1990s, altogether around 1,000 enterprises were moved (of which 334 were to the suburbs of Shanghai) and 3,750 thousand square kilometers of factory sites were vacated. (4) They made big and medium sized state-owned enterprises with serious amount of debt close down. In, 1997 and 1998, altogether 41 enterprises and in 1999, 26 enterprises failed. (5) They moved manufacturing equipment of traditional industries and outdated technology to other provinces and cities. At the end of the 1990s, the number of projects which enterprises in Shanghai established on their own and with other enterprises reached about 10,000. The total investment amount of Shanghai came up to more than 10 billion yuan (including investment for technology and equipment). For example, wire production for consumer electronics in machine tools for measuring instrument, monochrome television production, rectifier production for light bulb, etc., were moved to Qingdao, Fujian and Chengdu. Productions of cassette and solvents of chemical industry were moved to Jiangsu and Yunnan. Productions of detergent, drinking water, canned food, and of light industry were moved to Liaoning and Sichuan.

3.3. Choosing the key industry for Shanghai: Change and current situation 3.3.1. Some details On November 1984, Shanghai Municipal Government established the Shanghai Council for Reforming and Promoting Industries, and then submitted to the Chinese Cabinet the Fundamental Principles of Shanghai Economic Development Strategy, in which the Shanghai Municipal Government proposed industry promotion policies for the purpose of establishing industries which were energy saving, material saving, waste reducing, technology intensive, high value added. Based on these criteria, more than ten industries such as the automobile, power plant equipment, steel, petrochemical, tyre, and consumer electronics industries were selected.

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On September 1990, Shanghai municipality submitted an industrial development policy focusing on “ten key industries,” which indicated the automobile, telecommunication equipment, computer, power plant equipment, petrochemical, chemical, electrical machinery, steel, consumer electronics and chemical refining industries. At the beginning of 1994, six major key industries were made clear based on criteria such as market size, degree of input-output relations, degree of technological intensiveness, velocity of productivity growth, etc., which were the automobile, telecommunication equipment, power plant equipment production, petrochemical and chemical refining, steel, and consumer electronics industries. 3.3.2. Current situation and problems Table 3.1 shows the production amount of the six major key industries in Shanghai from 1995 till 2000. As indicated in Table 3.1, we can recognize the following characteristics. First, there could be unbalanced development speed in the six major key industries. Production of electronic telecommunication equipment rapidly increased from 11.8 billion yuan in 1995 to 44.59 billion yuan in 2000, which pointed to a 227.2 percent growth rate for five years. Also for the five years from 1995 to 2000, the development rate of four industries which were automobile, petrochemical, power plant equipment production, and electric telecommunication, was higher than the average growth rate of industries in Shanghai. However, the growth rate of consumer electronics was about the same as the average growth rate of industries in Shanghai. Therefore, we could say that at the end of the 1990s, some of the key industries like consumer electronics and steel, which have lost their advanced superiorities and industrial structure in Shanghai, had to be readjusted. Then, the six new major key industries began to surface, which are telecommunication, automobile, power plant equipment and large scale power equipment, petrochemical and refining chemical industry, high quality stainless steel (while whole steel industry has developed with lower rate, only high quality stainless steel has enjoyed its higher growth rate), and biomedicine (see Table 3.2). Those

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1997

1998

1999

2000

514.9 321.9 118.0 204.9

526.7 412.7 133.1 286.8

542.8 476.3 195.6 249.7

501.5 494.8 287.8 223.5

520.3 593.2 309.8 243.5

591.6 647.2 445.1 258.2

2.8 15.0 30.4 4.7

14.9 101.1 277.2 26.0

551.8

593.2

700.1

691.7

756.9

976.9

12.1

77.1

189.8

201.5

232.0

235.0

332.7

417.7

17.1

120.1

3,896.2

4,150.0

4,393.5

4,432.3

4,755.3

5,336.8

6.5

37.0

Source: Shanghai Statistical Bulletin 2001.

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Growth Rate (1995–2000)

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Steel Automobile Telecommunication equipment Power plant equipment production Petrochemical and refining chemical industry Consumer electronics

Average Annual Growth Rate (1995–2000)

Key Industries and Development of Industrial Policies in Shanghai

Table 3.1 Production amounts of six major key industries in Shanghai (100 million yuan, percent)

79

Amount (10,000 yuan)

Share (percent)

138,751 95,584 136,077

10,835,200 8,116,353 9,332,094

544,739 905,093 252,575

2,321,708 2,182,708 1,856,838

22.3 21.0 17.8

89,954

19,398,106

347,491

1,910,119

18.3

251,709

9,604,945

256,855

1,576,568

15.1

71,721

2,797,330

119,030

567,611

5.5

Total

783,796

60,084,028

2,425,783

10,415,617

100.0

Source: Shanghai Statistical Bulletin 2002, Shanghai Economic Committee, Building New Industrial Upland and Building New System: Research and Analysis on Shanghai New Industrialization Road, etc.

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Telecommunication Automobile Petrochemical and refining chemical industry High quality stainless steel Power plant and large scale power equipment Biomedicine

Profit Amount (10,000 yuan)

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Asset Amount (10,000 yuan)

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Number of Employees

Transition, Regional Development and Globalization

Value Added

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Table 3.2 Details of six new major key industries in Shanghai (2001)

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industries partly overlapped with High-Tech industries for which Shanghai municipality has selected.

3.4. Selection of High-Tech industries in Shanghai: Change and current situation 3.4.1. Some details In the second half of the 1980s, Shanghai started its high-tech industrial promotion policy by opening the “Shanghai municipality emerging industry development office,” “Shanghai municipality key project office,” “Shanghai municipality big scale plant office,” etc. Since 1991, Shanghai has established one after another the “Shanghai municipality committee for telecommunications industry,” “Committee on computer technology application,” “Committee on contemporary biomedical industry,” etc., under which each office has been set up and has come up with a series of concrete industrial promotion policies. When there was the Eighth Five Year Plan period, great importance of industrial promotion was placed on the thenestablished six major key industries. From the middle of the 1990s, in Shanghai it was clearly stated, “three major high-tech industries,” which indicate telecommunications (integrated circuits and computers), modern biomedical industry, and new materials. 3.4.2. Current situation The high-tech industry in Shanghai has grown rapidly and its importance in Shanghai industry has increased. Total assets and sales volume of the high-tech industry in 2000 was 17.8 percent and 21.8 percent respectively; its growth rate was 28.6 percent and 23.6 percent respectively. Also the profit of high-tech industries was 36.8 percent of all the industries in Shanghai, and profit ratio of sales volume was 9.9 percent which was much higher than the average ratio of Shanghai municipality industries. From 1991 to 2000, the average annual growth rate of three major high-tech industries

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Transition, Regional Development and Globalization Table 3.3 Details of high-tech industry in Shanghai

1991 1995 1996 1997 1998 1999 2000 Growth Rate (1991–2000)

Production Amount (100 million yuan)

Percentage of Total Industrial Production (percent)

220 746 751 871 980.3 1,130 1,435.5 23.2 percent

11.3 13.9 14.8 16.2 18.0 19.9 21.7

Source: Shanghai Statistical Bulletin 2001.

in Shanghai recorded 23.2 percent. This figure was much higher than the average annual growth rate of Shanghai industries, and the output of the whole industrial production also increased by 10.4 percent (see Table 3.3). Growth of telecommunications was in particular outstanding. In 2000, the shipment of telecommunication reached 128.15 billion yuan (in 1990 price), which was 20.1 percent of total industrial production in Shanghai and the value added amount came up to 19.58 billion yuan which had 10.9 percent share of Shanghai municipality industrial value added amount. The telecommunication industry has grown to be the first key industry in Shanghai in name and in reality. Enterprises on the telecommunication industry varied from foreign-owned to state-owned, etc., all of which enjoyed high rate of expansion. Among them, there were enterprises or group of enterprises which played central roles. For example, enterprises such as Shanghai Electronics Development Holding Group, SVA, Shanghai Bell Communications, Shanghai Computer, Shanghai Optical Fiber, Shanghai Pharm have played important role to lead each industry. As is mentioned later in this chapter, those enterprise groups have made agreements with each industrial development zone and have endeavored to allocate industrial resources in Shanghai.

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3.5. Presentation of city type industry in Shanghai and the current situation 3.5.1. Changes At the end of 1996, the then Mayor of Shanghai, Xu Kuang Di, submitted a policy entitled “Government Policy Report” to develop a city type industry. In 1997–1998, the Economic Committee of Shanghai formerly proposed a concept of “city type industry.” On 20th March 1999, in the “Report on Shanghai New Industrial Upland Building” by Shanghai Municipal Government, the concept of “New Industrial Upland” was interpreted as a “modern industrial system to be characterized by city type industry led by the high-tech industry based on supporting industries,” on which they have attempted to firmly establish the strategic concept of “city type industry.” The common meaning of city type industry is as follows. Their main works are manufactured products design, technology development, processing manufacturing for which advantages such as information distribution, human resource distribution, physical distribution, and capital movement are utilized. They locate offices and factories at the city type industry area for their survival. Their industries are also in harmony with city functions and the ecological system, which are called as modern green industry contributing to job creation, tax revenue, environmental protection and which improves the image of the city. At present, there are seven city type industries which have been established in Shanghai. They are apparel industry, wrapping and printing industry, food processing industry, interior decoration manufacturing, cosmetics and daily use detergent manufacturing, applied fine arts and sightseeing souvenir manufacturing, and small-sized telecommunication products. It is necessary for them to be individualistic and fashionable. Also, the offices are different from the traditional factory. They are required to meet industrial norms as industrial zone type (which has been accumulated in industrial zone), building type, SOHO type, chain store and network type.

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3.5.2. Current situation The number of employees in the city type industries in Shanghai in 2000 was 649,000, and their total asset, reached 129.18 billion yuan, which were 26.1 percent and 13.0 percent respectively of the whole industries in Shanghai. Other indices like value added of city type industries also show 10–16 percent share. We recognize therefore the city type industries have gained a very important position for whole industries in Shanghai (see Figure 3.1). The breakdown of city type industries shows that, with regard to the value added, apparel industry and wrapping and printing industry had big shares, and concerning the number of employees, apparel industry, interior decoration manufacturing, wrapping and printing industry and food processing industry gained big ratios. As far as tax revenue was concerned, wrapping and printing industry had much more share than other industries, and with regard to the number of enterprises, apparel industry and interior decoration manufacturing shared big ratios (see Table 3.4). 3.5.3. Tasks Shanghai’s plan for city type industries promotion has had from the beginning two purposes. First, it should take the responsibility for

Total Production 17.1

20

Share of Whole Industries

15

Tax Revenues 12.7

10

Shipment Amount 17.0

5 0

11.0

17.1

Total Profit

Sales Volume 15.8

Value Added Figure 3.1

Ratio of city type industries to whole industries in Shanghai (2000)

Source: Shanghai Statistical Bulletin 2001.

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Table 3.4 Details of city type industries in Shanghai (2001) Number of Employees Total Amount at the End of Tax Income Value Added Number of of Year 2001 (100 million (100 million Companies (10 thousand) yuan) yuan) Apparel Wrapping and printing Interior decoration Food processing Cosmetics and daily use detergent Applied fine arts and sightseeing souvenir Small-sized telecommunication

1,687 757 1,008 887 165

25.2 9.7 6.5 7.6 2.1

7.1 15.3 7.3 4.7 7.9

80.0 79.6 39.0 39.2 26.6

814

10.3

4.3

42.1

236

3.5

2.1

24.1

Total

5,554

65.0

48.7

330.5

Source: Shanghai Statistical Bulletin 2002.

unemployed workers from the reform and adjustment of traditional industries which started at the beginning of the 1990s. Second, it should be the response to the question if industries are not necessary for Shanghai when the strategic industrial adjustments called “3, 2, 1” are implemented. City type industries in Shanghai have developed. When compared with big cities of the world, however, they still have a rather big gap. City type industries such as apparel and food processing in New York, apparel and cosmetics in Paris, apparel, jewel processing, publishing and printing, toy producing in Hong Kong, are representative of those closely related with the respective city image because those industries have many top-brand articles of their own. In comparison with such big cities of the world, city type industries in Shanghai have still been at the early stage, and there might be a rather big gap to be with its own originality, even though they have some contribution for job creation. We could thus list a variety of problems in the city type industries in Shanghai in the light of its targets, of which the following three are

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important. (1) When we focus on the apparel industry, in the underwear market three Shanghai brands (Kaikai, Yi Er Shuang, Sanqiang) have a rather big share; however, with regard to the business suits market which are typical of apparel industry, no Shanghai brand can be listed. (2) Low value added could be pointed out as a problem. For example, Shanghai has a very big suitcase production enterprise which is the biggest in China and is one of the foremost of the world; however, it is inferior to others in its ability to design and it also does not have its own large-scale distribution sales center. Based on these, the suitcase enterprise has been concentrating on processing which is rather low value added. (3) Production types that have been old-fashioned, and less variety which could not meet market needs. For example, in food processing industry and interior decoration manufacturing, enterprises with actual results were concentrating too much on dairy products and beverages, and lights respectively, which caused keen competition within Shanghai and was less competitive outside Shanghai. The Shanghai market therefore lost against outside competitors. City type industries would be the long-lived ones because they are closely related with everyday life, and as far as a city has rather standardized scale of population it means a secured market for consumption. Becoming worldwide well-known city type industry has another requirement, which means to be at the forefront of fashion, brand, individuality, greenery, high-tech, etc. Being at the forefront in the above sense is necessary for the city itself to be in the forefront, which indicates that the city itself needs to provide for information center, R&D center, culture center, and consumers who are knowledgeable about the above factors and have purchasing power. City type industry is in the above sense a face of the city, and reflects the comprehensive ability and quality of the city concerned (see Figure 3.2).

4. Space Arrangement of Industries in Shanghai since the 1990s: Its Pattern and Change Industrial arrangement in Shanghai until the 1980s showed that city infrastructure construction, housing situation, etc., in Shanghai, was delayed and its space arrangement pointed out that heavy industries and polluting enterprises, etc., were in disorder. Such situations have

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Influential factor: population size Way of life: food, clothing, shelter, leisure, etc. Characteristics of city type industries Forefront: fashion, high-tech, individuality, brand, etc.

Influential factor: information center, R&D center, culture center, consumers of full knowledge and purchasing power

Figure 3.2

Influential factors to city type industry

Source: Author.

started changing in the 1990s. The following three patterns have been proposed and some of them realized.

4.1. Industrial arrangement pattern entitled “1 + 3 + 9” (see Figure 3.3) This is a plan submitted during the period of the “Ninth Five Year Plan” in order to form a characteristic industrial accumulation area. For index “1 + 3 + 9” to be concrete, the following were indicated. [1] indicates the Pudong New District (Zhangjiang HighTechnology and Engineering Park, Waigaoqiao Free Trade Zone, Jinqiao Export Processing Zone, etc.), which means accumulated areas of city style industries, of computer related, bio-related, automobile related and electronic products related industries. [3] points out the following three development areas. They are (1) Caohejing Economic and Technological Development Zone (accumulation of information related, high-technology related), (2) Minhang Economic and Technological Development Zone (of electric and electronic goods related and of medical supplies related), (3) Shanghai Chemical Industry Zone (of new material related and of petrochemical industry related). [9] indicates the following nine development areas directed by Shanghai local government. They mean that (1) Shanghai Fengpu Industrial Park (originally Fengpu Industrial Area) (accumulation of

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Figure 3.3

Industrial location in Shanghai

machine processing and of medical supplies related, etc.), (2) Xinzhuang Industrial Zone (for development of industrial area considering environment friendly and high value added ones, and accumulation of electric and electronic goods related, of telecommunication equipment related, of new material related, etc.), (3) Jiading Industrial Zone (of transportation equipment particularly automobile parts related), (4) Baoshan Industrial Zone (of new material related, etc.),

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(5) Kangqiao Industrial Zone (of automobile parts related, etc.), (6) Songjiang Industrial Zone (of electric and electronic goods particularly manufacturing export related sectors, etc.), (7) Qingpu Industrial Zone (of clothing, of biotechnology and of automobile parts related, etc.), (8) Jinshanzui Industrial Zone (of chemical industry related, of machine products related, of building materials related, etc.) and (9) Chongming Industrial Zone (of agricultural products and food industry products, of ship repairs related, etc.). Its basic policy has been that new industrial projects will be concentrated at the “1 + 3 + 9” area, and other industrial enterprises will be accumulated at the respective suburban industrial area. Inside the outer ring, tertiary industry and city type industry, etc., should be the main industries in Shanghai. As its concrete policy measures, it could be shown the long-term cooperative relations to form strategic partnerships between big enterprise groups and industrial zones in Shanghai, in which industrial zones establish industries with special characteristics and enterprise groups build up their production bases. In addition to the above, in order to realize the “1 + 3 + 9” industrial location, Shanghai municipality and respective district cooperate and form complementary relationships to each other. Also, Shanghai municipality economic committee has made its tentative management of city level industrial zone in Shanghai, with which they would have policy support for management system in industrial areas, tax revenue, statistics, planning adjustment, etc.

4.2. Ringed industrial arrangement pattern (See Figure 3.3.) The aim of the ringed industrial arrangement pattern is to basically move industrial arrangement from the inner (inside the ring) to the outer (outside the ring). 4.2 1. Inside the inner ring The fundamental policy of it is to attempt to accumulate tertiary and city type industries on the one hand, and to stop or move new

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investments of prohibited business from the inner ring toward the other areas. 4.2.2. Between the inner ring and the outer ring In addition to the arrangement of city type industry, information related industry, high-tech industry and key industry, prohibited business activities would be encouraged to convert to the above industries. Also, with regard to restricted business activities, they would be encouraged to move to industrial zones. 4.2.3. Outside the ring Following respective characteristics of each industrial zone allocated as mentioned above, they have accumulated industries and also built new towns (what is called “Yi Cheng Jiu Zhen”). Industries allocated outside the ring are equipped industries, material industries, heavy industries, etc. Its details show us that the Shanghai municipality party secretary in 1996, Huang Ju, directed the conference on Shanghai municipal rural areas by saying that urban areas should show the prosperity of Shanghai, and suburban areas should indicate the ability of manufacturing in Shanghai. At the time of the “Eighth Five Year Plan,” they already had the elevated highways construction plan in Shanghai which produced the two areas, the inner and outer ring. Based on these, the Shanghai Economic Committee worked out the adjustment plan of industrial arrangement for both the inner and the outer ring, which pointed out the committee made hard the plan of “The second out and the third in” (meaning they move the second industry and they attract the tertiary industry). In 1997, the Shanghai Economic Committee presented a plan entitled “The Plan what Shanghai Industries implement and what they do not implement”, in which initial design of the characteristic industrial arrangement in the three zones was proposed. In 1998, “The three years investment plan of Shanghai industries” (which was a report by Shanghai Economic Committee) made

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the characteristic industrial arrangement in the three zones clear. After the report was made public, the industrial arrangement plan has been often cited in reports such as the municipal government annual report and various economic reports by the Municipal People’s Congress. With regard to a long term target, they have worked out a detailed plan entitled “East-West-North-South-Center, Three Rings and Five Dragons.” The “East” indicates information related industries zones concentrating on semiconductor manufacturing, design, production, R&D, etc., which includes Zhangjiang High-Technology Park, Jinqiao Export Processing Zone, Waigaoqiao Free Trade Zone which are all located at Pudong New District, Caohejing Economic and Technological Development Zone, Songjiang Industrial Zone, Qingpu Industrial Zone, etc. “West” points out the automobile industry-related areas mainly of production, sales, R&D activities, which means Shanghai international automobile town (68 square kilometers in area) of Anting in Jiading Industry Zone, etc. “South” presents chemical industry related areas based on natural gas-related and fine chemical industry-related equipment, which are located at Fengxian District and Shanghai Chemical Industry Zone. “North” shows steel industry-related areas in which they produce high quality steel for automobiles, shipping, oil steel pipes, etc. The area is established as a manufacturing base at Baoshan Industrial Zone for Baosteel Group Corporation, etc. “Center” indicates city type industries base inside the ring. In addition to the above, the Shanghai “Harbor New Industrial Zone” has been recently established, starting with the Yangshan Port construction, which is located at Nanhui District in Shanghai and has accumulated precise processing equipment manufacturing, modern equipment manufacturing, transportation, distribution equipment manufacturing, etc. (65 kilometers from the center of Shanghai and 37 kilometers to Pudong Airport). Aiming at the biggest scale shipbuilding base of entire China, the “Shanghai Shipbuilding Industrial Base” has been established with

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accumulation of shipping machine and related equipment manufacturing along the coast of eight kilometers from Changxing Island, which is situated at the mouth of Yangtze River.

4.3. Industrial arrangement plan entitled “One Center and Five Zones” (See Figure 3.3.) The “One Center and Five Zones” plan was presented when it was decided that the 2010 Shanghai International Exposition will be held. The “One Center” is also called the “Pudong Golden Triangle,” which indicates the Lujiazui Finance and Trade Zone, and the Modern Distribution Industry Zone (Waigaoqiao Free Trade Zone — Pudong International Airport — Yangshan Port). The “Five Zones” are as follows. (1) Modern Service Industry Zone (Seshan National Resort Development Park — Hongqiao Development Zone — Nanjing Road Busy Streets — Band of Central Huangpu River and Lujiazui Central Business District). (2) Heavy and Chemical Industry Zone (the area spread over North and South from the built-up area). (3) Aquatic View and Related Industry Zone (Huangpu River — the Mouth of Yangtze River), whose plan has been to promote the high-tech industry, trade fair, tourism industry, cultural industry, education, real estate, ecology industry starting from Congming Island to develop for ecological island. (4) Suburban Industrial Zone (the area to promote the key industries for strategic industries, attracting domestic and foreign investments). (5) Agricultural Zone of Suburban Towns Type (with great importance on urban scenery, maintenance of ecological system, high value added agriculture, tourism-related agriculture). It is said that the “One Center and Five Zones” plan has been the one along the theme of the 2010 Shanghai International Exposition,

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which is “better city, better life.” It seems therefore that the international exposition will be a good opportunity for a developing city to be promoted towards a worldwide first-rank city. Lupu Big Bridge in Shanghai, which is the longest all over the world of the arched bridge made of steel, was opened on 28 June 2003. Both banks of Huangpu River under the Lupu Big Bridge are the exhibition area of the 2010 Shanghai International Exposition. After deciding to hold the international exposition in Shanghai in 2010, Shanghai municipality government has made the slogan to establish a worldwide first rank city. There are 18 facilities located at both sides of Pudong (east side of Huangpu River) and Puxi (west side of Huangpu River), which has been planned to be established in perspective in several years. They have decided on a schedule for the removal of factories and housing area of the planned site of the exposition, which is around 5.4 square kilometers, in order to establish international exposition-related facilities. The number of houses and people moving have reached 8,500 and 25,500 respectively. Also moving are large-scale factories of steel industry and ship building industry, etc., in which facilities have become too old to use and are highly polluted.

5. Final Considerations 5.1. Main policy measures for industrial development in Shanghai: The advantages and disadvantages of development zones 5.1.1. Roles of development zones The “Economic Development Zone” is evaluated as the four windows of contact. Effects of foreign direct investment have been not only the introduction of foreign capital, but also some others such as transferring advanced technology, transferring efficient ways of management, expansion of job opportunities, promotion of human resources, foreign exchange acquisition, which have various advantages for China’s economy in transition.

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It could be said that the main policy measures for industrial development in Shanghai are of the above kind of “development zone” way. When they attract industries and allocate new spaces, they utilize the “development zone” to adjust the industrial structure towards a more advanced one (meaning reforming traditional industries and promoting key industries, high-tech industry, city type industry, etc.). 5.1.2. New tendency At the end of 1992, nationwide social disorders against the development zone booms took place. Also recently, various illegal developments of farmlands and chaotic investment expansion arising from too many development zones without permission, etc., were brought about by independent developments led by local government. The central government therefore often gave written notices all over China after July 2003 as part of the macro-control policy and indicated to restore order. According to the notices, legal development zones by the central government are the following two: (1) national level development zones which the central government has rectified, and (2) province level development zones which each province and direct controlled municipalities under central governement like Shanghai approved. Other development zones in which cities (except direct controlled municipalities under central government), counties, districts under cities, towns, etc. are independently established are considered illegal. 5.1.3. Background of putting development zones in order and its measures Due to overproduction in development zones, farmlands fell into ruin and the area of agricultural land rapidly decreased. This caused the people to lose their farmlands, and it became a serious social problem. It also brought about a serious food security issue which showed that China’s agricultural production dropped for four consecutive years after 1999 (although it increased in 2004). Based on the above, since February 2004, specialist teams in institutions such as the Ministry of Land and Resources have examined each development zone and have placed large scale development zones all over China (especially in

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Shanghai, Jiangsu province and Zhejiang province, in which their economies have grown and various kinds of economic development zones have bristled) in order and have made their number smaller. 5.1.4. Suggestion: Tasks to challenge models of accumulating advanced factors China changed its strategy from the “Regional Priority Development Strategy” in the 1980s, to the “All Front Open Strategy” in the 1990s. The change was along with the state policy change, emphasizing more on industrial structure adjustment and more vitalized stateowned enterprises. Also, the “Whole Directions Development Strategy” in the 1990s meant that regional priority strategy was eliminated and each region had to create its own competitive advantages by its own efforts. The second task mentioned previously, which Shanghai had faced, to build the way towards a vertical division of labor of which Shanghai reaches the peak among cities of Yangtze River Delta, seems to be closely connected with the above. The present situation shows that among the development area in Shanghai, there has been keen competition. Among development zones in Shanghai and development zones in other cities, for example, Kunshan economic development zone, which has grown to be an accumulated zone of enterprises on information industry in Taiwan, could easily be seen as strong competition for attracting foreign capital. We can therefore say that the horizontal separation of the works is more real than vertical separation. What is the key for the transformation towards vertical separation? We think the “advanced factor” could be the crucial one as the origin of competitive advantage. In other words, it is the factor arising from concentration of high quality human resources, R&D bases and related industries, access to foreign market information, telecommunications system, mature markets supported by the middle class, existence of society stimulated competition and innovation, institutional environment, etc. Shanghai in that sense has to grow towards the model with such an advanced factor. In this chapter, we propose the following on industrial sectors.

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5.2. On the relations between the secondary sector and the tertiary sector We think that the key towards industrial advancement is to have reasonable relations between the secondary sector and the tertiary sector. The proposal we would make here is also a reply to the first task mentioned previously, which is a “way how to adjust the secondary industry in the direction towards an international city.” As indicated before, the “Shanghai New Industrial Upland Building” since the 1990s has shown it as reforming and adjusting “traditional industries,” and as choosing and promoting “key industries for Shanghai,” “Shanghai High-Tech industry” and “urban type industry for Shanghai.” In relation with the above, the following two should be pointed out. First, we could recognize a tendency of “2.5 industrialization” in the above key industries. The phenomena of “2.5 industrialization” in Japanese industries, which started in the 1970s, show the tendency of increasing the non-physical input at the stage of production with physical input. The “2.5 industrialization” could be recognized to contribute for the wide variety of efficiency improvements like more efficient management of the secondary industry and market strategy progress. The task to find a way to put forward the 2.5 industrialization for the advanced factor in Shanghai’s manufacturing sector is, we think, both government and business societies. Second, development for office services seems to be an indispensable prerequisite. The tertiary sector means various industries, which includes ordinary restaurants, as well as rather advanced financial services, etc. In Shanghai, under the slogan of “towards an international financial center,” from the beginning of the 1990s, policies for financial service have been promoted with great importance. In the 10 advantageous policies for Pudong New Development Zone by the central government, advantageous measures for financial service were remarkable. However, the concept of office services might not be well clarified and its statistical analysis has never been enough.

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The office service is rather specialized to support other advanced industries, it could also be said as indispensable for central city, in which head offices are concentrated. It is in the form of information service, advertisement, professional service, like lawyer’s office, accountant’s office, designer’s office (Ministry of Health, Labor and Welfare, 1999). In Tokyo in 2001, the percentage of employees of office service was 55.5 percent of overall service industry, which was higher than the 19.0 percent of personal service, and 25.4 percent of public service (Bureau of Industrial and Labor Affairs in Tokyo, 2003). We expect therefore the promotion of office services in Shanghai, which never had enough clear policies.

5.3. On the relations between Shanghai (China) and the Chugoku Area ( Japan) The western part of Japan has had close relations with the Chinese continent in terms of human, physical, economic and cultural aspect, because of their geographic location. In the postwar Japan, much attention was given to Tokyo, which might be related to the declining and closing economy and society in the Chinese continent. China revitalized after the reform and open door policy started, which could be a good opportunity for the western part of Japan to develop. We have the following three suggestions in planning a strategy. First, what is important is the expansion of human exchange and information collection and accumulation. Fukuoka prefecture, for example, established the Shanghai office to research and study their closer relations, which has indicated for the prefecture to attach greater importance to Shanghai. What opportunities for business do relationships with Shanghai have? A good example for this can be illustrated as follows. Economic growth rate in Shanghai in 2002 was 10.9 percent, which showed two-digit growth rates for 10 consecutive years. Per capita GDP in Shanghai reached US$4,900 which was higher than in Malaysia (US$ 3,531 in 2000). During this period, new rich people have come into existence, who are in the administrative post of enterprises of

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foreign-owned, finance and securities, information and High-Tech related, and also are private-owned entrepreneurs. They are usually called the new middle class3 and they have led the current consumption trends in Shanghai such as to enrich their leisure activities and to go sightseeing abroad. In 2001, the number of Shanghai citizens acquiring passports reached around 1,400 thousand (about eight percent of the population), whose reasons were various, including official tour of inspection, studying abroad at government expense and private expense, sightseeing, business related tour, etc.4 The western part of Japan is geographically close to China and has many sightseeing spots. It is an important task for them to make their sightseeing spots well-known and to attract Chinese tourists. Second, it is fairly clear that in Shanghai, greater importance was given to large scale projects (depending on multinational corporations) when they attract foreign related manufacturing enterprises. Especially in the development areas of national level and Shanghai city level this is regarded seriously. Development zone of district at city and country levels usually attract small and medium sized enterprises. However, it is difficult for them to overcome cities near Shanghai in terms of business costs. The task for such development zones is therefore to find a way to maintain a higher efficiency compared with their higher business costs. Meanwhile, development zones located far away from the center have lower business costs but at the same time they face problems to promote advancement of industrial structures and how to maintain their economic activities, combining their economy with the economy of Shanghai. Ironically, Shanghai was not chosen as one of the most active 10 cities in China in 2004 (at the selection sponsored by Chinese Central TV, in November 2004) because Shanghai has been the symbol of 3

It is said that the new middle class shares 16.1 percent of employment in China, and comprises 100 million people all over China. Usually they have higher school background and are relatively of a younger age group of 20s and 30s. 4 The total number of Chinese citizens visiting abroad in 2001 reached 12.13 million, of which 57.2 percent (6.9 million) tourists were of personal expense. Since 2001, the number of tourists of personal expense has been more than of public expense.

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Chinese reform and open door policy since the 1990s and has had the market economy led by the centralized government. On the contrary, cities around the Yangtze River Delta such as Hangzhou, Wenzhou, Suzhou, and Wuxi have been in the limelight as their active economies were dependent on private-owned enterprises. It might be important for Japanese enterprises to evaluate “Shanghai” with its economic scale arising from historical significance, advantageous policies by the central government, and “grass roots activities toward market economy” in Zhejiang province and Jiangsu province, when they seriously consider investing in China. Third, as mentioned previously, there have never been enough developed office service activities in Shanghai. Small and medium sized enterprises in Chugoku Area will thus have good business opportunities. Compared with the manufacturing sector, when they develop their business activities in advanced service sector, it seems to be more indispensable for them to secure human resources who are knowledgeable in regions concerned and to establish close relationships with regions concerned, particularly with the economy and society at the actual location.

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Part II

INTERNATIONAL RELATIONS

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Chapter 4

Japanese Foreign Direct Investments in Central European Transition Economies

1. Introduction The internationalization of multinational corporations (MNCs) in the context of Central Europe (CE) has been intensifying since the start of transition in the region from central planning to market led in 1989. Since transition started, one of the most important modes of penetrating the CE market has been foreign direct investment (FDI). The supply of FDI in Central Europe has been mainly provided by Western European MNCs, Germany being the major player, followed by MNCs from the USA.1 The behavior of the MNCs already operating in CE through an investment mode of market entry would seem to question the Uppsala stages internationalization model2 suggesting processes of gradual and incremental international growth. The actions of MNCs that moved earlier on into CE can be explained using the network model of internationalization3 only for a limited number of cases.4 The “first mover” behavior of foreign MNCs can be better accounted for using the transaction cost analysis model5 of the internationalization process6 as emphasizing among other factors, those of opportunism and asset specificity.

1

Culpan and Kumar (1994), Jain and Tucker (1994), Peng (2000), Marinov and Marinova (2001). 2 Johanson and Wiedersheim-Paul (1975), Johanson and Vahlne (1977). 3 Johanson and Mattsson (1987). 4 Davis, Patterson and Grazin (1996), Lehtinen (1996), Salmi (2000). 5 Coase (1937). 6 Williamson (1975).

103

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All existing internationalization models refer to environments where change is characterized as slow, gradual, and with a high level of predictability. CE markets are generally perceived as turbulent with quick and sometimes with unpredictable environmental changes. Hence, investments in CE markets involve assumption of risk that sometimes is difficult to estimate. It is generally higher than in relatively more stable and predictable markets. The international recognition of Japanese MNCs can be traced back to the early 1960s. At that time, they were involved predominantly in internationalization through exporting. In the majority of cases, exporting referred to transportation and electronic equipment. The use of the export mode of market entry intensified in the 1970s. Production activities, centralized in Japan, have been spreading worldwide through FDI in the 1970s and continuing throughout the 1980s and 1990s. According to the official statistics of IMF, UNCTAD and JETRO, Japan was the fourth-largest world investor in 1994 and 1995 with FDI of US$18.1 billion and US$22.5 billion respectively. Despite the increase of FDI in absolute figures, Japanese MNCs could not keep the pace with the world’s largest investing countries. Japan dropped to sixth place in the world ranking in 1996 and 1997 with FDI of US$23.4 billion and US$26.1 billion respectively. In 1998, there was a decrease in Japanese FDI by 9.8 percent compared with its level in 1997. Figure 4.1 presents the change of Japanese FDI worldwide in the period 1991–2003. Japanese investment has shown a strong tendency towards preferential allocation. From being a negligible investor in the USA in the 1960s, by the late 1980s Japan became the second largest investor there, with more than 20 percent share of all cumulative FDI in the country.7 Japan is also the indispensable leading provider of FDI for the Asian countries.8 Japanese MNCs did not rush to take advantage of the investment opportunities in CE.9 Apart from some incidental acquisitions and 7 8 9

Lipsey (1994). Anand and Delios (1996). Artisien, Rojec and Svetlicic (1993), Bakos (1992).

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40000 35000 30000 25000 20000

US$ million

15000 10000 5000 0

1991

1993

Figure 4.1

1995

1997

1999

2001

2003

Japanese outward FDI worldwide (US$ million)

Source: JETRO, annual.

greenfield investments in the period 1989–1997, Japanese MNCs did not engage in substantial FDI activities in CE. According to JETRO statistics in the period 1990–1995, FDI inflow from Japan into CE, including the Commonwealth of Independent States, was US$763 million, whereas in the countries of Taiwan, Thailand and Singapore the FDI inflow from Japan for the same period was more than six times greater.10 Initially, instead of investing in CE, some Japanese MNCs, for example Nissan, have given a strategic priority to creating extensive sales and distribution networks across the region, expecting those to be instrumental in gaining large shares in the CE markets. In the first years of transition, this strategy proved successful providing a 25–35 percent annual increase of Japanese exports to CE on a year-on-year basis. Since 1992, the export strategy has proved unsuccessful across the region. All the same, Japanese MNCs have demonstrated hesitant behavior in engaging themselves in substantial FDI activities in CE. In this respect, Japanese MNCs have been more

10

JETRO (1996).

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risk adverse than many of their Western European and North American rivals. Perceived uncertainties in the CE region and substantial psychic distance between CE and Japan may be accountable for this behavior. Meanwhile, Western Europe was very much in the focus of Japanese MNCs during the 1990s, assuming that CE can be left for future consideration.

2. Japanese MNCs in CE: Pre-Transitional Perspective Before the start of the transition in CE in the late 1980s Japan had good economic and business relationships with the countries of the region.11 In the 1970s, intergovernmental agreements on economic, industrial, scientific, and technological cooperation were reached between Japan and most of the CE countries. Throughout the pre-transition period, some of Japanese MNCs participating in trade and investment activities in CE were: Ataka & Co., Itochu Co., Hitachi, Honda Motor, Kanebo, Matsushita Electric Industrial, Mitsubishi, Mitsui, Nissan Motor, NEC, Nissho-Iwai, Sony, Sumitomo Co., Toyota Motor.12 Economic cooperation between Japan and CE started in the 1960s. In the 1970s, many licensing agreements were concluded between Japanese MNCs and CE governments for providing mostly technology, patents, and technical know-how from Japan to CE countries and from some CE countries to Japan. The most active countries in the process were Bulgaria, former Czechoslovakia, former German Democratic Republic, Hungary, Poland, and former Yugoslavia. In the 1980s, many international joint ventures were created between Japanese MNCs and various CE governments. For example, Japan was the most important international joint venture partner of the Bulgarian government outside the Soviet Bloc member states.13 11 12 13

Hutchings (1999). Horaguchi (1992). Wolf and Razvigorova (1991).

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3. Japanese MNCs in CE: Post-Transitional Perspective After the start of transition the FDI inflows into CE started to grow mostly because of investments by Western European and MNCs from the USA. Most substantial growth of investment since 1996 has been indicated in Poland and recently in the Czech Republic, while FDI in Hungary has been leveling. Initially, the investments made by Japanese MNCs in CE were primarily as joint ventures and channeled mainly through Japanese affiliates based in Europe. Starting in 1996, signs of full-scale investments by Japanese MNCs in the manufacturing industries have begun to appear such as the creation of wholly owned subsidiaries by Matsushita Electric in the Czech Republic in 1996, Sanyo Electric Co. in Hungary, and Isuzu Motors Ltd. in Poland. However, the inflow of capital from Japanese MNCs into CE has been irregular and on a small scale. Table 4.1 provides data of the total FDI inflow in several CE countries and the share of Japanese FDI in it in the period 1990–1997. The most important motive of all foreign investors across CE has been “to explore the opportunity to operate on a longterm basis in the CE market.” This is a primary motive of Japanese investors as well. While the second important motive for all foreign investors is “to use CE countries as a gateway to other markets.” Japanese companies have considered the newly emerging markets of CE as a cheap production base providing cost-efficient and effective access to Western European markets and some of the marketplaces in the Middle East. For all foreign investors and Japanese investors, the third motive in terms of importance for investments in CE is to take advantage of the skilled labor in the region.14

14

See Marinov and Marinova (2001).

1993

1994

1995

1996

1997

1990–1997

FDI in the Czech R. FDI from Japan FDI in Hungary FDI from Japan FDI in Poland FDI from Japan FDI in Romania FDI from Japan Total FDI in Russia FDI from Japan

72 0 990 29 100 3 107 0 n.a 0

523 22 1,614 181 300 2 149 0 n.a 2

1,003 0 1,641 4 978 0 307 0 n.a 44

568 2 2,481 72 1,563 7 156 0 809 22

862 0 1,320 41 1,280 3 568 0 549 19

2,559 1 4,570 33 2,511 3 313 2 2,445 30

1,428 134 2,524 13 5,196 10 609 5 2,060 18

3,325 179 1,147 42 3,137 13 1,235 5 5,721 139

10,340 246 16,287 415 15,065 41 3,444 12 11,584 274

Percentage Japanese FDI

2.38 2.55 0.27 0.35 2.37

Note: Japanese investment in the Czech Republic till 1993 represents total Japanese investments in the former Czechoslovakia. Sources: National Statistics of individual CE countries, Statistics of the Japanese Ministry of Finance, Vienna Institute for Comparative Economic Studies.

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Table 4.1 Inflow of FDI in CE countries and the share of Japanese FDI (US$ million)

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4. Japanese FDI in Hungary Before the start of transition in 1989, Japanese MNCs had six investments in Hungary made in the period 1979–1989. The pre-transition cumulative of Japanese FDI in Hungary was approximately US$11 million. The most important part of the investment was in the financial and manufacturing sectors. Hungary became a country of interest for Japanese FDI after transition started. With the creation of Magyar Suzuki, Hungary became on top position in CE in terms of attracting Japanese FDI in the post-transition period. By the end of September 1992, the number of Hungarian companies with Japanese capital increased to 25 and the cumulative FDI reached US$221 million. When Suzuki started its production, several other Japanese MNCs invested in Hungary for supplying Suzuki’s operations. In late 1993, the then Daikin Corporation (now Exedy Corporation) started clutch production for the manufacturing of Suzuki’s cars in Hungary. In 1993 and 1994 the inflow of Japanese FDI into Hungary was mainly in the manufacturing sector. By the end of 1999, almost half of total number of the Japanese FDI projects in Hungary were in services, predominantly finance and banking. In value terms, Japanese investment in manufacturing was almost twothirds, while the number of manufacturing projects was less than 25 percent. The overall evaluation of the Japanese FDI in Hungary shows that Japan had only 2.55 percent of the total FDI inflow in Hungary in the period 1990–1997. Due to some recent trends of intensification of Japanese FDI in Hungary, its cumulative value has reached US$1 billion at the end of 2001, to reach 5.1 percent share of all FDI into the country. Most of the investments have been greenfield. By the end of 1999, there were 75 companies in Hungary with Japanese investment of US$750 million. The types of investments are presented in Table 4.2. Japanese FDI has followed the general trend of foreign investment inflows in Hungary. Initially, Japanese FDI went into joint venture

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Type of Investment/ Subsidiary Greenfield Acquisitions

Number

Capital Invested (US$ million)

Percent of Number/Capital

63 12

560 190

84/75 16/25

Source: Hungarian National Statistics.

formation with Hungarian private investors or the government. The importance of greenfiled investments has gradually increased since 1992, because of the success of previous investments and the introduction of government incentive programs.

5. Japanese FDI in Poland Until the start of transition, Japanese FDI in Poland was in only one company set up in mid-1989. Japan lagged far behind the USA, Western Europe and South Korea in terms of investment in the country.15 By the end of 1999, there were eight Japanese FDI cases in Poland with a total value of circa US$5 million. All of them were trade representative offices, three of which were wholly owned by Japanese MNCs, as for example, Toyota Motor Poland. Japanese Matsushita together with Dutch Philips made the first more substantial Japanese investments in Poland.16 Altogether Japanese FDI was on a much smaller scale in comparison to that made in the Czech Republic, Hungary and Russia in the period 1990–1997 (see Table 4.1). In two and a half years, from January 1998 until June 2000, Japanese MNCs invested eight times more than in the previous nine years.17

15

Morita (1998), Morita and Stuglik (1998). Morita (1995a, 1995b). 17 PAIZ Annual Bulletin (1992–2000). PAIZ was changed to PAIiIZ (Polska Agencja Informacji i Inwestycji Zagranicznych S.A. — Polish Information and Foreign Investment Agency). 16

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Table 4.3 Investments by Japanese MNCs in Poland from 1990 till July 2000

Investing Corporation Isuzu Motors Limited Bridgestone Corporation NSK-RHP Europe Ltd. Tohoku Pioneer Electronic Corporation Matsushita Electric

Capital Invested (US$ million) 192.7 45.0 39.2 35.7

22.5

Nichimen Corporation

5.6

Nomura Toyota

5.0 5.0

Nissho Iwai Sumitomo Corporation Europe Itochu

4.5 4.4

Kanematsu

1.0

1.0

Industry Automobile Rubber and plastics Machinery and equipment Electrical machinery Electrical machinery Machinery and equipment Wholesale trade Wholesale and retail trade Wholesale trade Trade and repair

Type of Investment Wholly owned subsidiary Joint venture Joint venture Joint venture

Joint venture Joint venture N.A. Joint venture

Joint venture Trade representative office Wholesale trade Trade representative office Wholesale trade Trade representative office

Source: PAIZ, Poland.

The amount of cumulative Japanese FDI in Poland at the end of year 2001 is estimated to be US$580 million. Table 4.3 presents information of the amounts Japanese MNCs invested in Poland, specifying the industry sector and type of investment. Most of the investments have been made in the manufacturing sector with approximately 60 percent in the automobile industry. Interestingly enough, this is the only investment in manufacturing that resulted in the formation of a wholly

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Table 4.4 Cumulative FDI by the major investing countries and Japan in Poland in the period 1 January 1990–30 June 2002

Rank 1. 2. 3. 4. 5. 16.

Country of Origin

Capital Invested (US$ million)

Percentage of Total Investment

France USA Germany The Netherlands Italy Japan

11,503.0 7,985.2 7,444.6 4,976.1 3,701.1 598.7

18.67 12.96 12.08 8.07 6.01 0.97

Source: PAIZ, Poland.

owned subsidiary of Isuzu Motors Limited. Most of the other investments went for the formation of international joint ventures with either Polish private and state capital or other foreign capital participation. Table 4.4 shows that Japanese MNCs have invested 19.2 times less than their French counterparts, 13.5 times less than the USA MNCs, 12.4 times less than the German MNCs, 8.2 times less than their Dutch rivals, and 6.15 times less than their Italian competitors.

6. Japanese FDI in the Czech Republic There were seven recorded Japanese FDI projects in former Czechoslovakia before the start of transition. The first successful case in the post-transition period of Japanese FDI in former Czechoslovakia was that of Summit Motors Czechoslovakia made in 1991 for the creation of a wholly owned subsidiary of the Japanese firm. The first large Japanese investment in the then-Czechoslovakia after the start of the transition was contracted in 1991 for acquisition of a large glass-making plant. The contracted investment amounted to US$232 million.

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By the end of 1992, there were altogether 30 Japanese subsidiaries in former Czechoslovakia, 10 of which were representative sales offices as the ones of Toyota and Nissan. Several joint ventures were created in 1993, most important of which was by Nissho Iwai. By the end of June 1999, the cumulative post-transition Japanese FDI in the Czech Republic reached US$579 million, representing 4.7 percent of the total FDI inflow in the country. By the end of 1999, almost 80 percent of Japanese FDI in the Czech Republic went into the manufacturing sector. From mid-2000 onwards, there has been a flurry of Japanese investment announcements in the Czech Republic. Since the second half of 1996, Japanese FDI in the Czech Republic has been growing (see Table 4.1). By the end of year the 1999, Japanese MNCs had invested almost US$620 million.18 Large-scale greenfield FDI in the Czech Republic was undertaken by Matsushita Electric Industrial Corporation, Toray Industries, Mitsubishi Electric Corporation and Showa Aluminum Corporation. Table 4.5 contains data of the FDI in the Czech Republic made by various Japanese MNCs in different industrial sectors, specifying the type of investment. Only three of the investments resulted in the creation of international joint ventures with the participation of Czech private or state capital. The Japanese participation in the joint ventures is small in value.

7. Comparison of Japanese FDI in the Czech Republic and Poland Table 4.6 presents data showing the concentration of Japanese FDI in the Czech Republic and Poland using the system of the Standard Industrial Classification (SIC). While the Japanese FDI in the Czech 18

CzechInvest (2000).

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Table 4.5 Investments by Japanese MNCs in the Czech Republic in the period 1990–2000 Investing Corporation

Invested Capital (US$ million)

Industry

Type of Investment

254.5 232.0 150.0 54.0 32.0 28.0 10.0 10.0 2.5 1.7 1.3 1.2 1.0

Electronics Glass production Textiles Electronics Automobile Automobile Engineering Automobile Metal industry Electrical Engineering Textile machinery Electronics

Greenfield Acquisition Greenfield Greenfield/acquisition Greenfield Greenfield Greenfield Joint venture Joint venture Greenfield Joint venture Technical cooperation Technical cooperation

Matsushita Electric Asahi Glass Toray AVX/Kyocera Mitsubishi Electric Showa Daiho Nippon Kayaku Nissho Iwai Co. Euro-Matsushita Tatsuno Toyota Denon

Source: CzechInvest, Czech Republic.

Table 4.6 Japanese FDI in the Czech Republic and Poland in the period 1990–2001

Industry

SIC

Percentage of Total Volume of Japanese FDI in Czech Republic

Textile mill products Apparel and other textile products Rubber and plastics Stone, clay and glass products Industrial machinery and equipment Electrical and electronic equipment Transportation equipment

22 23

0.15 19.20

0.0 0.0

30 32

0.0 29.81

12.44 0.0

35

0.32

12.39

36

39.99

16.10

37

8.99

53.29

Source: CzechInvest, Czech Republic; PAIZ, Poland.

Percentage of Total Volume of Japanese FDI in Poland

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Republic is made in seven industries, it is more concentrated in Poland encompassing five industrial sectors. In four sectors investments have been made in both countries. The most significant investment in the Czech Republic has been made in electrical and electronic equipment industry, while in Poland it is in transportation equipment. The traditionally strong industrial sectors in the two countries have received sole investments, in the Czech Republic — apparel and other textile products, in Poland — rubber and plastics industry.

8. Japanese FDI in Slovakia The first Japanese FDI in Slovakia was made in 1994 by Yazaki Corporation. It amounted to US$62,000. By the end of June 1995, JAIDO-OLIGO made a second investment for more than US$1 million. In April 1996, Sony created a wholly-owned subsidiary in Slovakia. United Electronics, Matsushita Electric and Sony made small investments in the period 1996–1998. By the end of year 2001, Japan has invested more than US$15 million in Slovakia, representing 1.3 percent of the total FDI inflow in the country, ranking Japan 22nd among the investing countries in Slovakia.

9. Japanese FDI in Romania According to the JETRO and Romania state statistics, there was no Japanese FDI registered in Romania before the start of transition. By the end of October 1991, there were seven FDI cases in Romania, all of which were for the establishment of sales representative offices, including the investment by Panasonic Distribution. At that time Japanese MNCs were trying to establish strategic alliances and joint ventures with the Romanian government or private domestic investors. However, the lack of domestic capital turned out to be a substantial deterrent for Japanese FDI in Romania. Instead,

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sales representative offices were created in 1992 and 1993 including the auto sales offices opened by Honda, Mazda, Itochu, Nissan and Sumitomo. By the end of 1993, there were five Japanese auto sales subsidiaries representing more than 75 percent of Japanese FDI in Romania at that time. By the end of 1996, the cumulative FDI from Japan into Romania reached US$7 million mainly due to the investment by Kokusai Boueki for the production of colored TV sets. According to official Romanian statistics, by the end of year 2001, the cumulative Japanese FDI in Romania reached US$17 million distributed among 75 projects. This investment ranked Japan in 39th place among the other investors in Romania with a share of less than 0.2 percent of total investment in the country. Hence, the position of Japanese MNCs in Romania is very weak. Japanese investors perceive Romania as a promising market. However, from their point of view the major obstacles for investing in the country have mostly been the lack of domestic capital to participate in joint investment, unstable environment, and underdeveloped infrastructure.

10. Japanese FDI in Bulgaria Before 1989, Japanese MNCs had established five international joint ventures with the Bulgarian government and had invested in them more than US$25 million. After the start of transition, two of the Japanese companies withdrew from Bulgaria in 1990 because of the unstable political and economic environment. By the end of 1990, there were three joint ventures in Bulgaria with the participation of Japanese capital. They were Fanuc-Masinex with the participation of Fanuc established in 1981, SOMICO with the participation of Tokyo Maruichi Corporation, created in 1982, and Medicom Systems, again with Tokyo Maruichi Corporation founded in 1986. In the three cases, the Bulgarian government continued to partner with the Japanese MNCs.

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In 1992, an auto sales representative office was created as a joint venture set up by Nissan and Tokyo Maruichi Corporation, on the Japanese part, and the then-state-owned Techno-ImportExport on the Bulgarian part. This was the first Japanese FDI in Bulgaria after the transition started with Japanese capital amounting to US$165,000. In 1994, three new sales representative offices were created. One of them was established as a joint venture with the participation of K&B International. The other two, TM Auto and Sony, created wholly-owned subsidiaries. Sumitomo established a new wholly owned sales representative office in 1995. Thus, by the end of 1995, there were seven post-transition Japanese investments in Bulgaria19 with cumulative investment of US$502,000. Eleven more small sales representative offices were created in 1996 with investment of US$678,000. According to the Bulgarian Investment Agency, by the end of 2002, the cumulative post-transition Japanese FDI in Bulgaria reached almost US$6 million, which placed Japan in 27th place among all foreign investors in Bulgaria with 0.57 percent contribution to total FDI inflow in the country in the period 1990–2002. The largest investment by a Japanese MNC in Bulgaria is the investment by Sumitomo Corporation in the wine plant Vinprom Svishtov amounting to US$1.86 million. Bulgaria was one of the strongest CE partners of Japan before the start of transition. Since then this position has weakened significantly, as transitional Bulgaria has been perceived as turbulent and very unstable both politically and economically.

11. Japanese FDI across CE The short outlook of Japanese FDI in six CE countries shows a general trend of low level of participation. Three CE countries, i.e., the 19

Marinov and Marinova (1997).

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Czech Republic, Hungary, and Poland, have received the bulk of Japanese FDI in the region amounting to almost 90 percent of the total Japanese FDI in the region. There is also a common trend among those three countries for a recent increase in the level of Japanese FDI inflow in them. This may be due to the improved economic conditions in those countries and the good perspectives they have for joining the European Union in May 2004. There was sluggish FDI inflow from Japan into Poland till 1996. In the early 1990s, two Japanese investments failed that possibly exercised negative impact on next Japanese FDIs. Daihatsu was overcome by the Italian Fiat for investing in FSO, while Asahi Glass was replaced by the British Pilkington for the acquisition of Sandomierz factory. On the other hand, Japanese FDI into Bulgaria, Romania, and Slovakia was exceptionally small. Those three economies with the approximate size and economic potential of Poland attracted less than US$40 million in the period 1990–2001, while the FDI inflow in Poland for the same period was more than 15 times larger. Almost all Japanese investments in Bulgaria, Romania, and Slovakia were for the creation of sales representative offices, with some limited occasional investments in production subsidiaries.

12. Short Case Studies on Japanese FDI into CE Countries 12.1. The cases of Daihatsu and Asahi Glass in attempting FDI in Poland As mentioned above, the Daihatsu case might have a serious negative impact on potential Japanese investors for entering Poland. The Daihatsu case is presented from the point of view of the Japanese corporation. The Polish company FSO started a process of modernization in the early 1980s. To make the process happen, the Polish government began negotiations with several foreign car producers in 1983. Sixteen

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automobile companies were considered for partnership. The Japanese candidates were Daihatsu, Sumitomo Co., and Itochu Co. Daihatsu presented its offer for partnership through Itochu Co. that had previously exported automobiles produced by FSO to third countries. Since the 1970s, Sumitomo Co. had imported Daihatsu-made passenger cars in Poland. Daihatsu, Itochu, and Sumitomo joined in a consortium that allowed them to make one proposal for partnership with the Polish government for the modernization of FSO. In the 1980s, Poland was considering the launch of a new model passenger car to be manufactured in cooperation with an outstanding automobile company. The new model would be a five-seater, 1,200cc engine type, manufactured at the rate of some 120,000 unit per year with 25 percent of output allocated for export. The project was for US$850 million at least half of which amount was expected to be invested by the foreign partner. According to Japanese sources of information, Japan had shown strong interest in the project. The existing consortium got one more member, Mitsui Co. The Japanese offer was supported at ministerial level and by the Japan-Poland Economic Committee, initiated by the chairman, Mr. Toshikuni Yahiro, president of Mitsui Co. The strongest rival to the Japanese consortium was the Italian automobile maker Fiat. The visit of then Japanese Prime Minister Yasuhiro Nakasone in Poland in 1987 was undertaken to make a positive impact on the negotiations between the Japanese consortium and Polish government. Before his visit to Poland, a specially made program on Polish National TV took the position that the visit was expected to have an important impact on the national passenger car project. Although initiated by private Japanese companies, the opportunities for economic cooperation between Japan and Poland were a high priority for the Japanese government. The possible cooperation between Poland and Japan was looked upon very favorably by the Polish government. The visit to Japan of the then First Communist Party Secretary, Mr. Jaruzelski, in 1987 had also very positive influence on the prospects of Polish-Japanese cooperation. According to a Japanese source of information, a major

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focus of the talks was the allocation of a medium-sized car production project to Daihatsu and a possible small-sized car production project to the Italian Fiat. At this stage the position of the Japanese consortium seemed stronger than that of Fiat. This situation was reflected in a very pessimistic statement by Mr. Giovanni Agnelli, the President of Fiat, concerning future prospects of Fiat in Poland. Mr. Agnelli officially admitted that Fiat had apparently lost the Polish contract to Japanese Daihatsu in a bid to build a modern car plant in Poland. He also admitted that the Japanese consortium had offered superior technology and better financial terms. A private credit was offered to Daihatsu before government support could be obtained for the Polish project. However, the Japanese consortium did not consider the bridge credit seriously. At the same time, the Japanese consortium was also in sharp conflict with the Japanese government concerning whether or not MITI would give the consortium a definite written promise of export insurance for the project. Meanwhile in the middle of October 1987, officials of the Polish Ministry of Foreign Affairs and Polish Ministry of Foreign Trade gave their opinion that Daihatsu would win against Fiat. At the same time, Poland was engaged in multilateral and bilateral negotiations concerning the rescheduling of its enormous foreign debt. Those negotiations had negative impact on the position of Daihatsu. When the agreement for the rescheduling of the debt was reached, on 19 August 1988, Mr. Tomohiro Eguchi, the President of Daihatsu, declared his pessimistic expectation regarding the severe competition with Fiat. On 8 September 1988, just after the successful agreement on the rescheduling talks of the Polish foreign debt, the Polish government requested that the Japanese government start new negotiations on interest rate in the first and the second rescheduling plan, which had already expired. However, the Japanese Ministry of Finance immediately rejected this request. After the rejection of the Polish request by the Japanese government, Mr. Pietrzek, the President of FSO, announced on the National

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TV that Fiat won the contract without previously informing the Japanese side about this decision. A year later when the drastic Polish transition towards a marketled economy began, the Italian involvement in the project had become uncertain; however, the Japanese consortium had already withdrawn definitely from it. Japanese investors thought that the failure of Daihatsu in the 1980s was over. They believed in new opportunities in Poland with the introduction of democratic reforms and transition towards a marketoriented system. However, in 1993, Asahi Glass was unexpectedly turned down by the Polish government at the very final stage just before the opening ceremony of establishing a joint venture with Sandmierz factory for float glass production. That contract was given to the British Pilkington. The failures of Daihatsu and Asahi Glass in attracting FDI in Poland have distracted many Japanese potential investors from entering Poland. Instead they gave preference to the Czech Republic and Hungary.

12.2. The case of Toyota in Poland Toyota has developed and implemented an important strategy toward expansion of European market mainly through its Belgian subsidiary, Toyota Motor Europe Marketing and Engineering (TMME) established in October 1990. Toyota finalized its strategy for the European market in 1997. The strategic priorities included the creation of a second car production factory in Europe starting production in 2001, introduction of a new car model, initial production capacity envisaged 10,000 cars a year. The probable investment sites were in France, because of easy access for local contents and in Poland, because of low labor cost. The UK was also considered for a possible production site. In terms of labor cost, Poland had a clear advantage. However, the CE market was considered small in size and with limited potential due to the small purchasing power of population. However, transportation costs from Poland to Western European markets would be approximately

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the same as from France or the UK. France had the advantage of a better location for export in Western European countries, the larger size of the domestic market, and in providing good supply of spare parts. Production sites in France included the disadvantages of high labor cost and short working hours. The major advantage of UK production location through the expansion of the factory in the UK would be the benefit of economies of scale. The major disadvantage of the UK was the high value of the pound sterling and British reluctance to join the EMU, which might result in foreign exchange instability. In 1997, the Polish government expressed publicly enthusiasm for attracting Toyota investment in Poland and offered Katowice for a possible investment site. Preferential treatment included 10 years exemption from corporation tax. The Polish government also emphasized the successful transition toward a market-oriented system resulting in expanding the car market in Poland. This brought about 46 percent increase in car sales in 1996 compared with the volume sold in 1995. The sale of new Toyota cars in Poland in 1996 reached the amount of 5,559 that gave Toyota only 1.3 percent of the Polish car market. Toyota lagged far behind its major competitors Fiat and Daewoo with 42 percent and 28 percent of the Polish market respectively. Meanwhile, Mr. Hiroshi Okuda, the then-President of Toyota, officially announced that the new Toyota factory in Europe was decided, the production site would be found by mid-1998, and the new plant would start production in 2001. To consider possible production sites, the corporation officials would visit Reims and Cherbourg in France and a city in Poland. In the second half of 1997, Toyota announced the final decision of production sites in three countries for making automobiles, engines, and transmissions. The second car production factory of Toyota would be located in France. The corporation would expand its production capacity of producing engines in the UK. The enlarged UK engine production of Toyota would be used for the manufacturing of the new small-sized car in the new production site in France. Toyota decided to locate its new transmission making factory in Poland.

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The total investment for the expansion of Toyota’s operations in Europe would amount to approximately US$2 billion. The main reason for the selection of France was that the France small-sized car market was one of the largest in Europe. France and Italy account for more than 65 percent of the European small car market. Poland was selected as a production location because of the perceived big potential growth of domestic and CE market. In 1998, Toyota finally decided on the transmission production site in Poland near the borders with the Czech Republic and Germany. What attracted Toyota into Poland and the town of Walbrzych? Three main reasons accounted for the choice of the country: the large size of the constantly growing market, the government incentives for 10 years exemption from corporation tax and the favored treatment on duties after Poland joins the EU. Walbrzych was chosen because of its favorable geographic position close to car markets, high unemployment rate in the region of 25 percent, and the availability of abundant subterranean water needed for industrial production. Toyota’s official announcement of FDI in Poland was made on 10 September 1999. The contracted investment was around 10 billion Japanese yen for initial employment of 300 workers. The transmission produced in Poland would be exported to France, the UK, and Turkey for Toyota car production in the three countries. By late 1999, Toyota had plans to establish a company for car sale in Poland through its wholly owned subsidiary, Toyota Credit Bank in Cologne, Germany. By early 2001, Toyota has considered establishing a diesel engine factory in Poland with approximately the same amount of investment as the transmission production factory. Toyota’s initial decision on a production site for the factory was UK. However, the corporation reconsidered it due to the unfavorable exchange rate of the British pound sterling making UK production incompatible. It is still an uncertain case, but we could recognize that Poland may be a rather attractive country for Toyota. In contrast to the failure case of Daihatsu and Asahi Glass, Toyota’s FDI in Poland has been successful, accounting for the diminished risk factor for potential Japanese investors.

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12.3. The case of Bridgestone/Firestone Corporation in Poland Bridgestone/Firestone Poland Sp. z.o.o. was officially registered as an international joint venture in July 1998. The Japanese Bridgestone Corporation, the world’s third largest car tire producer, has 71.2 percent stake in the company, and the state-owned Stomil Poznan S.A. owns 28.8 percent of the shares. Previously, Stomil had experience in producing tires for industrial vehicles, large size and plane tires. The new joint venture has focused exclusively on manufacturing of car tires. The joint venture capital amounts to US$63.2 million. The Japanese MNC initially invested US$45 million and made additional investment of US$31 million by the end of 2002 through its European subsidiary Bridgestone/Firestone Europe S.A. The Polish joint venture is Bridgestone’s sixth production plant in Europe and the first in CE. The strategy of the investor is to meet demand for car tires in Poland and CE. Three quarters of the production volume is mainly exported in Eastern Europe. During the first years, export has been mostly to the dynamic markets of the Czech Republic and Hungary. The biggest customer is the Polish operations of General Motors/Opel in Gliwice for the production of Opel Astra. In the first year of its existence, the joint venture produced 5,000 tires daily. Since its establishment, production has almost doubled and employment has been constantly increasing from the initial 300 employees.

12.4. The case of Suzuki in Hungary Suzuki Corporation Ltd. is a horizontal keiretsu with relatively low level of vertical integration. The corporation is controlled by Tokai Group and affiliated with Toyota. General Motors owns a minority share of Suzuki. To increase the international strength of the corporation and its bargaining power towards suppliers, Suzuki has entered into strategic alliances with Fuji Heavy Industries (Subaru) and Daihatsu-Toyota partnership. Presently, Suzuki has achieved limited internationalization towards core markets. The corporation has targeted peripheral markets and production sites to gain stronger bargaining

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position towards suppliers and host governments. For example, Suzuki has used Canada to penetrate the USA market, as well as Spain and Hungary to establish presence in the overall European market. As far back as the late 1970s, the Hungarian government was interested in attracting investments from Japanese car producers in general and Suzuki in particular. Suzuki started negotiations with the Hungarian government to set up a production plant in Hungary in early 1985. In 1989, the strategic priority of Suzuki’s investment shifted from producing car models in Hungary for the CE market to producing car models for the Western European market. The pressure from the intended investments in Hungary by Audi and General Motors/Opel, intensively searching at that time favorable locations for production facilities in Hungary and market opportunities in the CE, made Suzuki reconsider its strategic priorities and a compromise was reached to produce car models for both CE and West European markets. The major motives for Suzuki’s investment in Hungary were to make use of the cheap production base and utilize Hungary as a second springboard, apart from Spain, for penetrating the East and West European markets. Although Suzuki enjoyed a strong bargaining position in its negotiations with the Hungarian government, the negotiation process continued for almost six years. Simultaneously with the negotiations with the Hungarian government, Suzuki held talks with the Austrian and Spanish governments for creating production sites in the respective countries. The Japanese corporation targeted these three European countries aiming at overcoming trade barriers and getting easier access to the European markets. While the negotiations with the Austrian government failed, those with the Hungarian and Spanish governments succeeded. The Hungarian government refused Suzuki’s demand for a 10-year tax holiday, but the corporation got strong support from the local government that became a major incentive for Suzuki to create a production site in Hungary. Suzuki established its European car manufacturing base on a Hungarian production site near the town of Esztergom in 1990. It is Suzuki’s European principal production site, manufacturing Suzuki Swift and Suzuki Sedans. The plant cost Suzuki

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HUF 40 billion (US$190 million). It is still the largest Japanese investment in Hungary. The company is supplied by more than 40 local firms and employs 1,500 people. Suzuki selected a greenfield approach to the creation of its Hungarian plant, relying on a well developed independent exclusive supply infrastructure mostly consisting of small weak local companies. The relationships between Suzuki and its suppliers are problematic because of the low capacity of the Magyar Suzuki Rt. and the incompatibility of Suzuki’s components, being of Japanese design, with the components generally used in the car industry. So Suzuki is faced with the dilemma of exporting Hungarian-made components to other Japanese car producers in Europe or sending them to Japan for car production there. Magyar Suzuki Rt. was created as an international consortium. Its initial capital was HUF 5.5 billion, with 40 percent participation of Hungarian Autokonszern Rt., 40 percent of Suzuki Motor Corporation, 11 percent invested by the Japanese Itochu Corporation and 9 percent share of IFC. In 1996, Autoconszern Rt. maintained its existence and its shares were transformed into Magyar Suzuki Rt. shares. The ownership structure of Magyar Suzuki Rt. at the end of December 2000 was: 83.7 percent owned by Suzuki, 14.2 percent by Itochu Corporation and 2.1 percent by Suzuki’s Hungarian supplying companies. The first investment priority of Suzuki was export to Western European markets. Its second investment priority was the Hungarian market. However, initially the Hungarian car market proved to have a more limited potential than expected. Consequently, it became necessary for Magyar Suzuki Rt. to increase exports in the first years of its existence. In 1996, Magyar Suzuki Rt. exported more than 38,000 cars to become the largest Hungarian exporter in terms of revenue. The highest level of export was reached in 1997, amounting to 47,702 cars. Since then the number of Magyar Suzuki’s total sales have increased. However, this has been due to the constant increase of sales in the Hungarian market and decrease in the number of exported cars (see Table 4.7). The export of Suzuki Swift to the former Soviet Union started in the second half of 1993. The first deliveries were to Russia and

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Table 4.7 Sales of cars produced by Magyar Suzuki Rt. 1997–2001 Market sales

1997

1998

1999

2000

2001

Domestic Export

17,679 47,702

23,788 42,001

30,800 37,305

36,297 33.060

38.560 31,216

Total

65,381

65,789

68,105

69,357

69,776

Source: Hungarian Trade Office.

Ukraine. There was also great interest in the Baltic countries and Middle East. The long-term strategy of Magyar Suzuki Rt. has been to expand car exports in Europe including the whole CE region. To facilitate its CE sales, Suzuki relied on the established Japanese trade networks in the Czech Republic and Poland. Magyar Suzuki Rt. has followed a single sourcing strategy. To avoid export tariffs for its exported cars, the value of local components should be more than 60 percent of the value of the assembled car. Magyar Suzuki has successfully met this requirement posed by the Hungarian government, as since 1997, more than 70 percent of the parts and components for the Suzuki cars produced in Hungary have been made in the country. Suzuki requires from its local suppliers to use Japanese technology. Magyar Suzuki’s local suppliers have 2.1 percent stake in the company. In 1996, Suzuki sold more cars than General Motors/Opel and had become the best selling trademark in Hungary. In the same year, Suzuki had 20.5 percent market share in the country. In 1999, the Hungarian market for new cars expanded by almost 25 percent. Magyar Suzuki Rt. seizing this opportunity, increased sales in the domestic market by 28.5 percent. This has allowed the company to reinforce its leading position in the Hungarian passenger car market and cross-country vehicle market. In 1999, Suzuki increased its market share in Hungary by 1 percent compared with 1998. Among all other manufacturers of cars in Hungary, only Suzuki has successfully managed to sustain its market share growth in the domestic market since the creation of its Hungarian subsidiary.

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12.5. The case of Denso Corporation in Hungary The President of Denso Corporation, Mr. Hiromu Okabe, opened the corporation’s new production facility, Denso Manufacturing Hungary Kft’s in Szekesfehervar in August 1999 with registered capital of the Hungarian forint equivalent of US$53 million. For the creation of the Hungarian company for the production of diesel injectors, the Japanese MNC invested US$100 million through its European subsidiary Denso International Europe B. V. The construction project has been supported by a loan of US$19 million granted by the European Bank for Reconstruction and Development. Denso’s decision to invest in Hungary came on the basis of Suzuki’s successful operations in the country. Currently, the Hungarian subsidiary of Denso employs more than 500 people. Created more than 50 years ago, Denso Corporation, one of the world’s leading motor industry suppliers, has widespread international activities. Apart from Hungary, Denso has four other subsidiaries in Europe. The capacity of the Hungarian plant is 230,000 injectors a year. The major client of Denso Manufacturing Hungary is the Isuzu plant in Katowice, Poland. Other customers comprise car factories in Hungary and other CE countries. Denso also sells injectors to Western European automobile manufacturers, mainly to plants owned by BMW and General Motors.

12.6. The case of AVX/Kyocera in the Czech Republic The Kyocera Group is one of Japan’s 50 largest corporations. It is based in Kyoto, established in 1956 for the production of ceramic and electrical products. It is one of the world’s top 500 corporations. The Kyocera Group has production facilities and sales offices worldwide, employing more than 40,000 people. The US-based AVX Corporation is one of the world’s largest producers of passive electronic components. It is a part of Kyocera Corporation, Japan. AVX Corporation has 31 subsidiaries around the world employing more than 11,000 people. The company is

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rapidly expanding its activities to meet the constantly growing demand for electronic components. It has made substantial investment worldwide since the early 1990s. Sales are constantly increasing, reaching US$1.1 billion in 1997, 22.5 percent higher than in the previous year. AVX Czech Republic s.r.o. is a wholly owned subsidiary of AVX corporation, rapidly expanding its production at two Czech sites. Expansion of one of the production sites is in progress. AVX Czech Republic currently employs 3,000 people with further expansion of 450 employees realized by the end of 2001. The motives of AVX/Kyocera for their investment in the Czech Republic were the availability of a highly skilled workforce, labor flexibility and willingness to work 12 hour shifts for continuous production, availability of local technicians and toolmakers capable of designing, building and installing equipment for the production sites, the strong R&D skills in Czech universities, good capabilities of technicians for in-company product design and development. AVX/Kyocera began operations in the Czech Republic in the beginning of 1990 with small-scale operations for simple product testing. In 1991, factory space was purchased from a producer of plastic and electric capacitors. In 1992, AVX/Kyocera signed a long-term lease of large production facilities that was fitted as the new AVX plant by mid-1993. By the end of 1993, this production site employed almost 1,000 workers. In the period 1994–1998, the Czech subsidiary obtained quality certification by meeting the requirements of ISO9002 and QS9000. By 1996, the construction of a second plant was completed and by the end of the year it employed 1,000 people. Through continuous reinvestment in the first production site, by the end of 1997 the AVX subsidiary in the Czech Republic employed more than 2,000 workers. In 1998, the two production sites produced 20 percent of the global world annual supply of tantalum chip capacitors. AVX Czech Republic is the second largest Czech exporter operating “ship-to-store” to the distribution centers of AVX in Northern Ireland, Singapore and the USA, also performing direct sales to major end user clients worldwide.

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12.7. The case of Matsushita in the Czech Republic Matsushita Group is one of the largest consumer electronic producers in the world, having 27 production facilities for making Panasonic television sets in 25 countries all over the world. In June 1996, Matsushita announced its first US$66 million greenfield investment in the Czech Republic to establish Matsushita Television Central Europe Ltd. as a wholly owned subsidiary. A year later, production began in the city of Plzen. By mid-1998, Matsushita announced its second investment to assemble digital television sets. The Czech government provided the company with investment incentives for US$72 million during the second phase of the expansion of the plant. Currently, the production site employs 1,400 people. Matsushita has decided to expand the existing production of color TV sets of the Panasonic brand enriching them with a new production of stereo and digital sets on the site, creating additionally 1,500 new jobs by the end of 2005. Matsushita’s motives for investment in the Czech Republic were: • • • • •

Political and economic stability, representing a very low investment risk; Key geographic location, reducing logistic costs for export; The crucial assistance by the local government for obtaining a licensing permit; The availability of skilled, educated and cheap workforce; The personal commitment and dedication of the Mayor of the town of Plzen.

The initial production of 300,000 units in 1997 increased to 900,000 in year 2000. This output represents almost one-third of the annual production of television sets in Europe. The new production lines introduced in late 1998 represent the latest generation of digital television sets. More than 89 percent of the production output is exported, approximately one-third to Western Europe, one-third to North America and one-third to the CE markets. Initially, half of the export was planned for the CE markets. That figure was reduced

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because of the severe economic crisis in Russia in 1998. Matsushita had the idea to develop a network of local component suppliers. However, the Czech producers have had difficulties in meeting quality standards and volume requirements. Hence, only up to 10 percent of supply comes from the Czech Republic and about 20 percent from Central European Free Trade Agreement (CEFTA) member countries. The management team of Matsushita has set a target for developing the local supply system in the Czech Republic and CEFTA countries so that almost all supplies come from the region. The Matsushita project in the Czech Republic is the most substantial Japanese investment in the country and one of the largest in the CE. In early 1999, Matsushita Group opened its second plant for the production of electromagnetic relays, employing 100 people. In October 2000, Matsushita announced the joint establishment by Matsushita Electric Industrial Co. and Matsushita Communication Industrial Co. of a new company in the Czech Republic to manufacture mobile telephones and car audio equipment. The new company, Matsushita Communication Industrial Czech s.r.o. was set up in the city of Pardubice and started production in October 2001. The initial investment in the company is of CZK 3.27 billion (8.5 billion Japanese yen) employing about 550 people.

13. Conclusions Japanese FDI in CE has been disproportionately small in comparison to the size and significance of the Japanese economy, and the participation of Japan in the world FDI outflow. The overall FDI inflow from Japan into CE has been estimated at US$2.9 billion at the end of year 2002. This amount is more than 17 times less than the German investments in the region for the same period and more than 15 times less than the USA investment. Japanese FDI in CE in the period 1990–2001 represents a mere 0.75 percent of the total FDI inflow in the region. This may be due to the low level of interest shown in the early years of transition by Japanese MNCs for undertaking investment mode of market entry in the CE region. On a later stage, the Japanese investors became very cautious, hesitant, and risk-averse as

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the Japanese perceive those market economies as being uncertain and volatile. The CE economies where Japanese MNCs have invested can be divided into two groups. The first group comprises of the Czech Republic, Hungary, and Poland. These three countries have attracted US$1.9 billion in Japanese investments by the end of 1999. They have been perceived as less risky and more promising because of their inclusion in the first wave of countries that join the European Union in May 2004. While the Czech Republic and Hungary have attracted several large Japanese investments in the early years of transition, Poland lagged somewhat behind. This was due to the negative early investment experiences of Daihatsu and Asahi Glass corporations. The more recent successful large investments in Poland undertaken by Isuzu and Toyota seem to have changed the negative trend. Japanese investments in greenfield ventures strongly prevail in the three countries. While in both the Czech Republic and Hungary, Japanese FDI has resulted mostly in the creation of wholly-owned subsidiaries, in Poland joint ventures have been the most common form of investment. The second group of countries consists of Bulgaria, Romania, and Slovakia. Investments in these countries have been perceived as riskier. As a rule, Japanese MNCs have invested in the creation of sales representative offices in the three countries. Incidental investments have been made in production, for example, in the wine industry in Bulgaria, color television sets production in Romania, and in the electronic sector in Slovakia. Post-transition Japanese investments in CE have been undertaken mostly on the basis of previous relationships between Japan and respective CE countries in the pre-transition period. While the Czech Republic and Hungary have been benefiting from the good pre-transition relationships between each of them and Japan, the favorable previous development of relationships between Bulgaria and Japan has been largely damaged in the post-transitional period. This may be explained with the more stable environment and better progress towards transition to market orientation of the economies in the Czech Republic and Hungary than in Bulgaria,

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as well as the pitfalls in the early reform of the banking sector in Bulgaria. In the last few years, there has been a clear trend of gradual increase in the amount of Japanese FDI in CE. They show a high degree of gravitation towards the Czech Republic, Hungary, and Poland. It can be suggested that the major drive behind this fact is the accession of the three countries to the European Union since a strategic priority of Japanese companies has been to ensure a significant business presence in the single market of the European Union. The investments of Japanese MNCs in the manufacturing sectors in CE have been vertically integrated with other Japanese businesses. A good example is the automobile industry where vertical integration has been achieved within and across national borders inside and outside the CE region. Japanese investments in other parts of the world have been far more substantial than in CE. Japan is among the world’s largest investors. The industrial and technological capabilities of Japanese companies have been renowned all over the globe. Their experience in know-how development and adoption, and productivity improvements can be a major source for revitalizing the industrial sectors of the CE countries. The Japanese companies need to enhance their understanding of the CE business environment and be offered support in establishing reliable contacts with CE institutions and businesses. CE governmental and non-governmental institutions could play a major part in it. In addition, CE governments can learn from each other’s experience in attracting Japanese investors to their specific country contexts. The long-term commitment and decisive investment of Japanese businesses into CE can send an encouraging signal to CE governments and businesses for mutually beneficial investments. The Japanese companies should focus on developing a regional CE investment strategy for market penetration and development, rather than considering the CE mostly as a springboard to EU markets and as a low-cost production base.

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Chapter 5

Development Strategies and Income Disparities in China: Comparisons with Central Europe*

1. Introduction We have never had so far enough analyses on transition and development in China particularly in comparison with Central Europe, which undoubtedly has led to insufficient assertions upon its features and its way towards transition in China.1 The most standardized point of view we now have indicates that China has been attempting its transition with a gradual approach from centrally-planned to marketoriented, even if it has never displayed systemic change (from a socialist system to a capitalist system2). Also, the standardized view tells us that China has been successful in its transition. In Poland, with which we will compare China in this chapter, they have recognized it as being reformed by a radical way towards market-oriented system (also Poland as being transformed from socialist to capitalist system), and generally speaking, Polish transition has been evaluated as successful in Western countries, although which might be a little different from domestic evaluation. Unless we are very specific about a problem, arguing whether a reform is “radical” or not does not seem to be so meaningful. A more important way of approaching it is looking at what policy goals * The authors are grateful to Dr. Ksymena Rosiek (Krakow University of Economics, Poland) for her kind permission to reproduce Table 5.12 in this chapter. 1 Particularly we cannot have enough discussions considering if China’s way of transition has been consistent with “market socialism” originally from Oskar Lange. For a good survey on this, see, for example, Lavigne (1995). 2 See, for example, Komiya (1983) and (1989).

135

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a transition economy has. Also, we should ask what benefit and what costs the transition economy would have in completing the policy goals, and if the policy has been appropriate or not. We think it is necessary to investigate reforms from such viewpoints. Polish transition has been, we think, in a “strange mix,” which means a mix of radical financial measures with delayed procedures of structural reforms. It has seemed to be related with high rate of unemployment particularly after 2000. Chinese transition which started at the end of the 1970s, from centrally-planned to market-oriented, has caused regional disparities, which have been thought mainly as a disparity between state-owned sector and non-state-owned sector.3 The non-state-owned sector could be divided into the following two; one is a sector based on inward foreign direct investment, and the other is on private enterprises. For example, growing regions in China in the 1980s were classified into two models, which were (1) Guangdong Model making use of foreign-owned enterprises and (2) Jiangzhe model being led by TVEs. What is interesting for us, however, is that after the second half of the 1990s, the Jiangzhe model itself has been differentiated within the Yangtze River Delta region for more development, Jiangshu province in FDI activity area and Zhejiang province in private enterprises activity area. As is well known, transition in China has had lots of characteristic features which have made its transition difficult to correctly recognize. There could be, however, any reason for the successful transition. One of the purposes of this chapter is to investigate the reason for the successful transition in China, by observing the Yangtze River Delta region, by observing inward FDI situation and by paying attention to income disparity changes. Another is to make clear the differences of Chinese transition with Central European transitions which have attempted to transform from centrally-planned to market-oriented as well as from a socialist to a capitalist system.

3

Chen (2001).

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This chapter is divided into five sections and conclusion. In the first section, we have an overview about China and Central Europe focusing our attention on Poland. In the second, we investigate inward FDI in Central Europe paying attention particularly on Poland. In the third, we examine inward FDI in China by analyzing its way of transition and the impact of FDI on it, and considering remarkable characteristics of the subregions in Yangtze River Delta. In the fourth, we study development model differentiation and income disparity changes in Yangtze River Delta region. In the fifth, we investigate based on the above analyses, the overall Chinese transition, particularly the creative destruction process in the Chinese gradual reform, and the income disparity issue. Finally, there is a short conclusion on this chapter.

2. Overview: China and Central Europe4 2.1. Several basic indicators In this section, we have a short overview on transition economies concerned here, which are China, Poland and Hungary. As is well known, Poland has started its transition process since 1990 through a radical approach, and Hungary through a gradual approach. As a matter of fact, the Hungarian reform, had started much earlier than Poland, in 1968. China adopted a different path for systemic transition which started at the end of 1978, and it is said that China has been managed by socialist market economy principles, although we will not fully investigate here in this chapter the socialist market economy and market socialism issues. Table 5.1 illustrates basic indicators on the three countries. Population and GNI (Gross National Income) in China were beyond comparison with other two countries, 33.7 times and 127.6 times more than Poland and Hungary respectively (in population), and

4 Our description in this section and in the following sections, we owe much to the JETRO office in Warsaw and in Budapest, and the JETRO Shanghai Center for their reports and documents.

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Transition, Regional Development and Globalization Table 5.1 Several basic indicators of China and Central Europe

Population (millions, 2003)

China

Poland

Hungary

1,288.4

38.2

10.1

GNI (US$ billion, 2003)

1,417

201

64

Per capita GNI (US$, 2003)

1,100

5,270

6,330

9.5

4.7

2.4

GDP growth rate (percentage, annual average, 1990–2003) Value added as percentage of GDP (2003) Gini coefficient

Agriculture 15 Agriculture 3 Agriculture 4 Industry 53 Industry 31 Industry 31 Services 32 Services 66 Services 65 0.447 (2001) 0.376 (1992)

0.316 (1999) 0.272 (1992)

0.244 (1999) 0.279 (1993)

71

74

72

Population below the poverty line (national poverty line, percentage)

4.6 (1998)

23.8 (1993)

17.3 (1997)

Corruption perception index

3.4 (2004) 3.1 (2000)

3.5 (2004) 4.1 (2000)

4.8 (2004) 5.2 (2000)

4.9

35.2

32.5

Inward FDI (flow, US$ million, 2002)

52,700

4,119

857

Inward FDI (stock, US$ million, 2002)

447,892

45,150

24,416

23

3

25

24 (2004) 31 (2005)

57 (2004) 57 (2005)

42 (2004) 37 (2005)

Life expectancy at birth (2002)

Tax revenue percentage of GDP (1997)

High technology exports percentage of manufactured exports (2002) World competitiveness ranking

Source: World Bank, World Development Report, annual; UNCTAD, World Investment Report, annual; Transparency International, Global Corruption Report, annual; IMD World Competitiveness Yearbook, annual; etc.

seven times and 22 times more than Poland and Hungary (in GNI). As far as per capita GNI is concerned, China’s per capita GNI was 5.8 times less than Hungary and 4.8 times less than Poland. This big differences among the figures may persuade us to agree with

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Lavigne (1995), who says about the Chinese model it “is tempting and too easy to answer that this is an entirely different world, with different traditions and different social behavior” and also has a question if China is “the proof that market socialism is possible under a communist regime” (p. 244). (Needless to say, different explanations are possible, as Lavigne asserts.) We have about the same figures on inward FDI as on GNI. Flow amount of inward FDI in China in 2002 was US$52.7 billion, and in Poland US$4.1 billion, in Hungary US$0.86 billion and stock amount of inward FDI in 2002 was US$447.9 billion (China), US$45.1 billion (Poland), and US$24.4 billion (Hungary). Regarding the per capita inward FDI stock in 2002, FDI stock in Poland and in Hungary was 3.3 times more and seven times more respectively than in China. Several development indicators suggest both differences and similarities among the three countries. Annual GDP growth rate (1990–2003) of China was 9.5 percent, and of Poland 4.7 percent, and Hungary 2.4 percent. Gini coefficient in Poland (1999) and in Hungary (1999) was 0.316 and 0.244 respectively, both of which seemed to be rather moderate income disparity. However, China’s Gini coefficient (2001) reached 0.447, which seems to be significant income disparity. As far as the sector’s value added as percentage of GDP (2003) is concerned, the percentage of agriculture and industry in China was much higher than in Poland and Hungary, while the percentage of services in China was much lower than the other two countries. Poland has much less of high technology exports percentage of manufactured exports, which was three percent in 2002, than Hungary (25 percent) and China (23 percent). Also, Poland’s ranking of world competitiveness has been much lower (57th in 2005) than China (31st) and Hungary (37th). China has lesser tax revenue percentage of GDP — 4.9 percent in 1997 (authors’ calculation stands at 10.95 percent), than Poland (35.2 percent) and Hungary (32.5 percent). Corruption has been a serious social issue for China, Poland and Hungary since many years ago. The 2004 corruption perception index

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(which means 10 is highly clean and 0 is highly corrupt) of China was 3.4 (71st rank of 145 countries), Poland 3.5 (67th rank) and Hungary 4.8 (42nd rank). Several indicators thus generally show rather better position of China and Hungary, than Poland.

2.2. Ways of transition With regard to Central Europe particularly Poland, one of the authors stated at the second half of the 1990s as follows. The situation has been basically unchanged even if it has become slightly better for the last few years (see Morita, 2004). In the transition from a centrally-planned economy to a marketoriented economy, needless to say (we do not discuss the definition here), there are some patterns. Usually economists have assumed the two patterns of a “radical reform” and a “gradual reform” and with their distinctive features they have applied the patterns to actual transition economies. That approach has been so limited that we have such appropriate wording as “hidden shock therapy.”5 However, unless we are very specific about a problem, arguing whether a reform is “radical” or not does not seem to be so meaningful. A more important way of approaching it is looking at what policy goals a transition economy has. We should also ask what benefits and what expenses the transition economy would have in completing the policy goals, and if the policy has been appropriate or not. Arguing a topic of “radicalism vs. gradualism” is, (as previously mentioned), mostly leading to vague conclusions not to helpful results. Nuti and Portes (1993) is an example. According to them, shock therapy is essential since otherwise there would be a danger of the transition process being dragged back as a result of dilution of the new rules of operation of the economy. For instance, temporary maintenance of subsidies might result in a lack of interest in improving productivity and discontinuance of the restructuring of production. On the other hand, gradualism is essential in construction of the new 5

Bakos (1994), p. 1191.

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institutional system, which is of its nature a longer-term process. However, for them, gradualism is nothing other than a gentler version of shock therapy.6 Also, we often come across such arguments as theirs; the differences between gradualism and shock therapy are small since, on the one hand, the possibilities of implementing gradual changes are limited; on the other, there are areas of the economy in which “big bang” style therapy is not feasible. It has been a fact that both Poland preferring the radical method and Hungary selecting the gradual method had serious negative growth rates, high inflation and huge number of unemployed workers. In that sense, the differences between them are surely small. Emphasizing the point of small differences might not only be making problems vague but is also very dangerous. The small discussion on differences has given the governments concerned: (1) a convenient “excuse” and (2) a dubious attitude, both of which are dangerous when there is an urgent necessity for radical structural reforms. As a matter of fact, the Polish radical reform seems equal to a structural reform without active government activities. The first serious action that the governments in the process of systemic transition in Central Europe take is to dismantle the centrallyplanned production structure and move towards improving the efficient production structure and lessen the unemployment cost by labor movement. Until the end of the 1990s, we could not recognize any government (in transition economies) which implemented the policies mentioned above. Mainly because, according to our understanding, their transitions have been in line with stability-oriented reform. With stability reform, the actual basic structure of production (regardless of the ownership) would be unchanged, the unemployment rate would be stark being in the vicinity of 15–20 percent, the inflation rate would still be in 20–30 percent, and the real Gross National Product (GNP) growth rate would be stable at around five percent. (See Morita and Bozyk (1997), Morita (2004).) 6

See Bozyk (1999), pp. 32–33.

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The above argument did not show anything on China. Pomfret (1997) analyzes and asserts China, by whom China was in growthoriented and Central Europe in system change-oriented reform. Pomfret’s way of recognition seems to be correct. However, Pomfret’s argument is based on the recognition which insists that reform in China (of growth-oriented, not of system change-oriented) has been in socialist system, and it has never had enough working of market mechanism. Also, there is an argument discussing China comparatively with Poland, which is by Balcerowicz (1995). According to Balcerowicz, an argument in favor of (Chinese) gradualism “is a patent misuse of the facts.” The three facts mentioned by him are as follows; First, “At the beginning of its reforms in the late 1970s, China was facing only a relatively mild macroeconomic imbalance, whereas, for example, Poland in mid-1989 was confronted by a macroeconomic catastrophe,” and “Radical stabilization was necessary in Poland,” “but it might not have been quite so necessary in China.” Second, “what happened in China was a massive de facto privatization of agriculture, in which 80 percent of the population was employed.” “Third and most importantly, the Chinese economic success was largely related to the peculiar feature of China’s initial conditions — the aforementioned fact that 80 percent of the population was employed in agriculture and that this agriculture was technologically divisible, and thus easy to privatize.” (1995, p. 250) Therefore, by the Balcerowicz’s summing-up, “to take the success of the Chinese economic reform as an argument in general discussion about gradualism versus the Big Bang is an expression of some serious methodological errors and in particular shows an inability to understand the role played by specific initial conditions and the specific factors which accompanied this transition.” (1995, p. 251) As mentioned previously, correctly understanding the Chinese way of transition is a difficult task to do.7 Pomfret’s way of recognizing the reform methods in China and in Central Europe is as insisted before correct. However, from our 7

See also Sachs and Woo (1994).

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viewpoint which is based on the recent few years’ facts, particularly of economic development in the Yangtze River Delta region, reform in China has been more market-oriented than Pomfret’s recognition. Moreover, if it is said in the same way as Pomfret says, dealing effectively with the serious problems for each country needs a more system change-oriented way in China’s reform, and a more growth-oriented way in Polish reform, whose changes could be recognized in each country’s transition.

3. Inward FDI in Central Europe 3.1. General tendency of Inward FDI in Central Europe The issue of inefficiency in the former Soviet Union and former East European economies which led to the collapse of their economies should be questioned by asking why Soviet-type planned economy could not work efficiently enough. A suitable way to approach the question is to consider the reasons in the “phase of stagnation”8 of CMEA (Council for Mutual Economic Assistance). Generally speaking, the above-mentioned may be explained by the following two reasons: first, there is a limit to “extensive growth,” which means a growth pattern mostly contributed by factor increase not by increase of total factor productivity.9 Second, it is due to inconvertibilities, currency inconvertibility and commodity inconvertibility. According to Holzman,10 while currency inconvertibility can be eliminated by adjusting irrationally overvalued exchange rates, a more serious problem arises from another inconvertibility, commodity inconvertibility, which is closely related to the rigidity of the socialist economic system. The above-mentioned explanations are caused by (1) delayed technology progress, and (2) rigid structure of socialist system. 8

See Robson (1980), Brzezinski (1960) and Spero (1985). It is not discussed in this chapter the issue whether or not China’s economy has gone into an orbit of extensive growth or of intensive growth. On this issue, see for example, Ohashi (2005). 10 See Holzman (1974) and (1976). 9

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CMEA countries therefore had attempted to transfer latest technology from Western enterprises, and to negotiate the financing. However, needless to say, such attempts generally failed. (If they have been successful, neither systemic transition nor the end of Cold War was necessary.) Both explicitly and implicitly, it goes without saying that systemic transition in the former CMEA countries has been for the preparation to receive inward FDI which transfers both technology and finance for host countries. Inward FDI receipt has varied from one country to another, but since the beginning of the 1990s, the inward FDI in Central Europe has been fundamentally unchanged, the three Visegrad countries (Poland, Hungary and Czech Republic) have shared more than 70 percent. Table 5.2 indicates the general tendencies. Also, inward and outward FDI stocks as a percentage of GDP point out another trend of the three Visegrad countries (and China). As Table 5.3 shows, the remarkable increase of percentage in Czech reached more than 50 percent and a rather saturated situation (but increasing share of outward FDI) in Hungary, and still less than 25 percent share in inward FDI (and less than one percent share in outward FDI) in Poland. It also indicates gradual but recently extreme increase of the GDP percentage of inward FDI in China. As for the FDI home countries toward Central Europe, among the Visegrad three countries Germany, France and the Netherlands take a

Table 5.2 Inward FDI in Central Europe (stock; US$ million, percent)

Central Europe(*) Czech Hungary Poland Three countries share of CE

1985

1990

1995

2000

2001

2002

49

2,841 1,363 569 109 71.8

31,980 7,350 11,919 7,843 84.8

98,137 21,644 19,804 34,227 77.1

119,969 27,092 23,562 41,031 76.4

145,794 38,450 24,416 45,150 74.1

49 100

Source: UNCTAD, World Investment Report, 2003. Note (*): Central Europe here includes Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia and Montenegro, Slovakia and Slovenia.

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Table 5.3 Inward and outward FDI stocks as a percentage of GDP: China and Central Europe 1980 Czech inward outward Hungary inward outward Poland inward outward China inward outward

1985

0.2

3.1

3.4

1990

1995

2000

2001

2002

3.9

14.1 0.7

42.1 1.4

47.4 2.0

54.8 2.1

1.7 0.6

26.7 1.1

42.5 4.4

45.4 8.4

38.2 7.3

0.2 0.2

6.2 0.4

21.7 0.7

22.4 0.6

23.9 0.7

7.0 0.7

19.6 2.3

32.3 2.4

33.2 2.7

36.2 2.9

Source: UNCTAD, World Investment Report, 2003.

Table 5.4 Major home countries of FDI in Poland (flow, 2004) (US$ million, percent) FDI (flow)

Share

France USA Germany Netherlands Sweden Belgium Italy UK ROK

1,575.7 1,428.1 1,175.1 981.7 437.5 413.8 224.5 204.1 202.0

20.1 18.2 15.0 12.5 5.6 5.3 2.9 2.6 2.6

Total

7,857.7

100.0

Source: PAIiIZ.

higher percentage. Although, for example, Hungary does not have France and UK as major FDI home countries, it is undoubtedly the Visegrad countries have had close FDI relationship with EU countries, even it varies from year to year, as Tables 5.4 and 5.5 display.

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Transition, Regional Development and Globalization Table 5.5 Major home countries of FDI in Hungary (flow, 2003) (million EURO, percent) FDI (flow) Spain Austria Netherlands Germany USA Belgium Japan Total

Share

406 389 165 112 64 53 32

28.3 27.1 11.5 7.8 4.5 3.7 2.2

1,436

100.0

Source: JETRO, 2004.

3.2. Serious problems in the Polish transition In this section, we will concentrate on Poland. As mentioned previously, Poland had also been preparing to receive inward FDI through the Balcerowicz program. However, in the 1990s, Poland had not performed well enough to receive FDI compared to Hungary and Czech Republic. Several indicators, as shown in Table 5.1, also display Poland’s poorer performance related with technology and competitiveness, etc. Table 5.6 shows Poland’s economic performance from 2000 to 2005. It shows that the real GDP growth rate is not below zero, but a rather low rate of 1–4 percent. One of the most serious issues for Poland seems to be undoubtedly the extremely high unemployment rate. It had reached around 20 percent. What does the high unemployment rate show? We may recognize the Polish mentality which is described as “ultra-liberalism.” That seems to explain why around 20 percent of unemployment rate can exist. Needless to say, the 20 percent unemployment rate demonstrates the inefficiency of state-owned enterprises and is a result of restructuring. The restructuring has happened in industries such as coal and agriculture. Actually the number of workers in the coal industry in 1990 was 563,000, but it decreased in 2003 to be

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Table 5.6 Economic indicators of Polish economic performance

Real GDP growth rate (percent) Inflation (CPI, percent) Unemployment rate (percent) Balance of payment (million US$) Foreign deficit (million US$) Foreign exchange reserves (million US$) Budget deficit (percentage of GDP)

2000

2001

2002

2003

2004

2005

4.0

1.0

1.4

3.8

5.3

3.4

10.1

5.5

1.9

0.8

3.5

2.1

15.1

19.4

20.0

20.0

19.1

18.1

−9,952

−7,166

−5,009

−4,599

−10,522

−4,364

69,465

71,797

84,875

106,961

128,658

129,453

26,562

25,648

29,794

34,168

36,783

42,571

−2.2

−4.5

−5.4

−4.8

−3.9

−3.4

Source: JETRO (Warsaw Office). World Economy Research Institute, Poland: International Economic Report, annual.

200,000.11 It is without doubt correct to mention that being more efficient should eliminate more redundant factors of production. It is called as “the second wave of restructuring” in Poland (WERI, 1999/2000). From Table 5.7 by GUS (annual) and WERI (annual), we recognize unemployment situation in each voivodship (meaning prefecture). It makes clear that for example in Mazowieckie in 1997 that the unemployment rate was 7.6 percent and in Warminsko-Mazurskie in 1997 it was 19.7 percent, and their unemployment rates in 2003 were drastically raised to be 15.1 percent and 30.6 percent respectively. What we have to understand correctly is that the 20 percent unemployment rate undoubtedly indicates that the Polish economy is still inefficient, and that Polish experts usually insist current Polish government generally puts too much weight on decreasing the budget deficit 11

On the actual situation about the Polish coal industry, we owe much to Rosiek (2005).

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Transition, Regional Development and Globalization Table 5.7 Unemployment rates in Polish voivodships (1997 and 2003; percent)

Slaskie Mazowieckie Malopolskie Wielkopolskie Lubuskie Opolskie Podlaskie Pomorskie Lodzkie Swietokrzyskie Podkarpackie Dolnoslaskie Lubelskie Kujawsko-Pomorskie Zachodniopomorskie Warminsko-Mazurskie

1997

2003

7.3 7.6 7.6 8.0 10.3 10.5 10.8 11.0 11.4 12.1 12.3 12.8 13.2 13.9 13.9 19.7

17.4 15.1 16.2 17.3 27.6 21.4 17.0 22.6 20.8 22.0 20.3 23.9 18.8 24.7 28.2 30.6

Source: GUS, Rocznik Statystyczny (Statistical Yearbook), annual. WERI, Poland: International Economic Report, annual.

(to satisfy the Maastricht Convergence Criteria), and puts less weight on unemployment situation. Needless to say, one of the main goals in Poland has been to participate in the Euro Area, for which satisfying the Maastricht Convergence Criteria is necessary. As Table 5.6 indicates, Polish percentage of budget deficit to GDP (the Maastricht Convergence Criteria needs less than three percent) is far from meeting the criterion. Subsidies for the coal industry which means, needless to say, an increase of budget deficit, reached 17.5 billion zlotys in 2003. It can be easily expected that the unemployment situation as in the coal industry has become so aggravated that some action has to be taken. Aggregate demand increase by government expenditure has been introduced by force. As far as structural reforms are concerned, helpful information is given by Aslund and Warner (2004) with structural reform index as shown in Table 5.8. We recognize Polish structural reform is now in

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Table 5.8 Structural reform index 1994

1995

1996

1997

1998

1999

2000

0.19 0.16 0.20 0.57 0.13 0.13 0.68 0.22 0.16 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04

0.62 0.79 0.32 0.74 0.29 0.33 0.72 0.36 0.79 0.10 0.10 0.10 0.10 0.22 0.13 0.04 0.14 0.04 0.11 0.04 0.04

0.86 0.86 0.64 0.78 0.51 0.55 0.82 0.45 0.86 0.20 0.38 0.49 0.23 0.32 0.39 0.25 0.35 0.33 0.20 0.13 0.26

0.66 0.90 0.81 0.82 0.67 0.78 0.82 0.58 0.83 0.33 0.51 0.59 0.13 0.35 0.42 0.31 0.35 0.60 0.26 0.16 0.30

0.63 0.88 0.83 0.83 0.71 0.79 0.83 0.67 0.83 0.42 0.54 0.67 0.33 0.33 0.46 0.33 0.42 0.71 0.42 0.29 0.50

0.61 0.82 0.77 0.82 0.67 0.71 0.79 0.65 0.79 0.50 0.64 0.64 0.54 0.50 0.54 0.40 0.50 0.71 0.40 0.27 0.57

0.57 0.82 0.78 0.82 0.74 0.74 0.79 0.64 0.79 0.44 0.64 0.71 0.57 0.61 0.61 0.44 0.64 0.67 0.40 0.27 0.57

0.67 0.82 0.82 0.87 0.74 0.74 0.81 0.66 0.77 0.37 0.64 0.72 0.59 0.66 0.61 0.51 0.66 0.70 0.39 0.36 0.54

0.79 0.90 0.90 0.93 0.86 0.82 0.86 0.76 0.90 0.37 0.76 0.64 0.65 0.79 0.76 0.61 0.79 0.82 0.55 0.36 0.57

0.79 0.90 0.93 0.93 0.86 0.82 0.86 0.82 0.90 0.37 0.76 0.64 0.65 0.79 0.76 0.61 0.72 0.79 0.58 0.36 0.50

0.85 0.93 0.93 0.93 0.82 0.86 0.86 0.82 0.89 0.43 0.75 0.64 0.68 0.79 0.72 0.65 0.71 0.79 0.61 0.35 0.49

149

Source: Aslund (2002), p. 161, and Aslund and Warner (2004), p. 233. Note: The “formula” of this index is as follows. “The first element is 0.3 times EBRD’s index for price liberalization and competition policy. The second element is 0.3 times EBRD’s index for trade and foreign exchange liberalization. The third element is 0.4 times EBRD’s index for largescale privatization, small-scale privatization, and banking reform. Each index is normalized to reach a maximum of 1” (Aslund, 2002, p. 161).

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Bulgaria Czech Rep. Estonia Hungary Latvia Lithuania Poland Romania Slovakia Belarus Moldova Russia Ukraine Georgia Armenia Azerbaijan Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan

1990

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the second wave and was around 86 percent in 2000, and is lower than Czech (93 percent) and Hungary (93 percent). Table 5.9 shows the regional GDP in Poland. It indicates as De Broeck and Koen (2000) mentioned “a significant increase in regional disparities between 1992 and 1996.” However, the degree is completely different from China’s income inequalities, which is mentioned later. What are the characteristic features of Poland’s privatization? Table 5.10 indicates the private sector as share of GDP in 1991–1999 on Central Europe. In 1991, Poland’s share was much higher than other countries, but at the end of the 1990s, it became less than other countries, particularly Russia. Compared with Table 5.11 on Table 5.9 Regional GDP (Poland) 1986

1990

1991

1992

1995

1996

2.19

2.53

2.35

2.03

2.22

2.30

Average of top five over average of bottom five

Source: De Broeck and Koen (2000), p. 18.

Table 5.10 Private sector as share of GDP, 1991–1999 (percent)

Poland Czech Hungary Russia

1991

1992

1993

1994

1995

1996

1997

1998

1999

40 15 30 5

45 30 40 25

50 45 50 40

55 65 55 50

60 70 60 55

60 75 70 60

65 75 75 70

65 75 85 70

65 80 80 70

Source: EBRD, Transition Report, 2000.

Table 5.11 Private sector as share of industry production in China (percent)

Private State Collective

1985

1990

1995

1997

2000

3.06 64.86 32.08

9.76 54.61 35.63

29.44 33.97 36.59

36.36 25.52 38.11

62.57 23.53 13.90

Source: Nakagane (2002), p. 157.

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China’s share (of industry production), China quickly caught up with Poland. Table 5.12 shows the private sector as percentage of industries, which shows that even the manufacturing sector in 2003 shared 75.3 percent and privatization of the coal industry had been delayed. EBRD classified the ways of privatization (EBRD, 1997), and clarified the primary method of Hungary as sales to outside owners, of Czech as voucher privatization, of Russia as voucher privatization, and of Poland as management employee buyout. Till the end of the 1990s, privatized firms through capital privatization were only 18 percent, through direct privatization 98 percent, and through liquidation 46 percent. Polish privatization was, as often mentioned, delayed and the delayed firms were concentrated on capital privatization, which means “large state-owned enterprises with a good financial situation” were rather in small number. We thus think that the approximately 20 percent unemployment rate in Poland is from factors such as delayed capital privatization, lower

Table 5.12 Gross output of industry by sections and ownership sectors (percent) 1990 Total Public sector Private sector

100 82.6 17.4

1995

2000

2003

100

100

100

51.3 48.7

28.0 72.0

21.9 78.1

6.13 0.01

7.6 0.2

3.8 1.5

3.4 1.3

76.50 17.36

34.1 48.3

15.0 70.0

8.2 75.3

9.6 0.2

9.2 0.5

10.3 1.5

Of which Mining and quarrying Public sector Private sector Manufacturing Public sector Private sector Electricity, gas and water supply Public sector Private sector Source: Rosiek (2005).

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rank of world competitiveness, lower percentage of high technology exports of manufactured exports, less structural reform index, etc. These undoubtedly reveal that Poland’s economy is less efficient than Hungary’s and Czech’s and also show less per capita FDI inflow in Poland compared to Hungary and Czech.

4. Inward FDI in China 4.1. Inward FDI in East Asia and in China East Asia region generally indicates Japan, NIEs, ASEAN and China. Active capital movement since the second half of the 1980s seems to a driving force for high speed economic growth in the region. As Table 5.13 clearly shows, the Asian crisis which happened in 1997, had serious negative effects on capital movement towards Asia, particularly towards FDI inflow to ASEAN countries. Inward FDI to ASEAN countries in 1998 drastically decreased, which was US$11.6 billion less than in 1997 (35 percent decrease). Indonesia, for example,

Table 5.13 Inward FDI in East Asia (1997–2002; US$ billion) 1997

1998

1999

2000

2001

2002

World 481.9 686.0 1079.1 1393.0 823.8 651.2 Developing economies 193.2 191.3 229.3 246.1 209.4 162.1 Japan 3.2 3.2 12.7 8.3 6.2 9.3 ROK 2.8 5.4 9.3 9.2 3.5 2.0 China 44.2 43.8 40.3 40.8 46.8 52.7 Hong Kong, China 11.4 14.8 24.6 61.9 23.8 13.7 Taiwan, Province of China 2.25 2.2 2.93 4.93 4.11 1.45 ASEAN-10 countries 33.38 21.81 24.3 18.18 14.67 12.93 Indonesia 4.7 −3.6 −2.75 −4.55 −3.28 −1.52 Malaysia 6.3 2.7 3.9 3.79 5.5 3.2 Philippines 1.26 1.72 1.73 1.35 0.98 1.11 Singapore 13.53 7.59 13.25 12.46 10.95 7.66 Thailand 3.88 7.49 6.09 3.35 3.81 1.07 Vietnam 2.59 1.7 1.48 1.29 1.3 1.2 Source: UNCTAD, World Investment Report, 2003.

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suffered from inward FDI reduction due to unstable domestic political situation, aggravation of economic situation, etc. Although not as serious, the decreasing tendency was also found in ROK, Hong Kong and Taiwan, especially reductions in 2001 and 2002. The only exception to this tendency in East Asia was China. Inward FDI inflow in China has been very high which was more than US$50 billion in 2002. This was the highest in the world followed by the USA. Reasons for this were, first, a high and a stable rate of economic growth, and second, becoming a WTO member in December 2001. Regional structure of inward FDI in China is displayed in Table 5.14, which shows that its fundamental structure has remained unchanged. The Chinese business network indicating Hong Kong, Macao, Taiwan, etc., has occupied 40–50 percent (if including Virgin Islands, it will become more than 50 percent). The share of ASEAN’s 10 countries has gradually shrunk. Table 5.14 Major home countries of FDI in China (flow, actual; percent)

Hong Kong, Macao, Taiwan Hong Kong, Macao Taiwan, Province of China ROK ASEAN-10 countries Singapore Malaysia Thailand Philippines Indonesia Japan USA Virgin Islands Cayman Islands Europe Total

1999

2000

2001

2002

2003

47.8 41.3 6.4 3.2 8.2 6.6 0.6 0.4 0.3 0.3 7.4 10.5 6.6 0.9 11.9

44.6 38.9 5.6 3.7 7.0 5.3 0.5 0.5 0.3 0.4 7.2 10.8 9.4 1.5 11.7

42.7 36.3 6.4 4.6 6.4 4.6 0.6 0.6 0.4 0.3 9.3 9.5 10.8 2.3 9.6

42.3 34.8 7.5 5.2 6.2 4.4 0.7 0.7 0.4 0.2 7.9 10.3 11.6 2.2 7.7

40.2 33.9 6.3 8.4 5.5 3.8 0.5 0.5 0.4 0.30 9.4 9.4 10.8 1.6 8.0

100.0

100.0

100.0

100.0

Source: China Statistical Yearbook, annual, JETRO Shanghai Center.

100.0

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4.2. Regional accumulation of inward FDI in China In this section, we investigate the regional accumulation of inward FDI in China. Needless to say, as regional economies in which they have active FDI, we could point out the following three: (1) the Bohai Rim Region, (2) the Yangtze River Delta region, and (3) the South China Region (see Figure 5.1). The regional accumulation of the above three indicates that during 1995–1998, the Bohai Rim Region shared more in its accumulation (from 19.21 percent to 28.8 percent), and the South China Region to the contrary shared less (from 42.42 percent to 28.7 percent). The share of the Yangtze River Delta region steadily and gradually rose (from 24.71 percent to 29.3 percent). After 1998, however, it was found that both shares in the Bohai Rim Region and South China Region relatively fell off, and extremely accumulated tendency towards Yangtze River Delta region. This means that, although in 1998 the above three regions had about the

Figure 5.1

The three big regions in China (East, Center and West)

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Table 5.15 Regional distribution of FDI inflow (percentage of national total) 1998

1999

2000

2001

2002

2003

2004

28.8 7.9 5.9 2.4 8.4 4.2 29.3

25.9 4.3 3.9 2.2 8.0 7.5 30.4

29.4 5.7 5.7 1.9 8.0 8.1 32.3

23.8 3.9 3.0 1.2 6.0 9.7 39.7

22.2 3.3 2.5 1.4 6.3 8.7 42.7

25.7 5.2 2.7 1.5 5.6 10.8 45.9

27.8 4.1 3.6 1.3 5.6 13.2 42.1

The Bohai Rim region Beijing Tianjin Hebei Liaoning Shandong Yangtze River Delta region Shanghai Jiangsu Zhejiang South China region Guangdong Fujian Hainan Guangxi

11.2 14.5 3.5 28.7

10.0 15.7 4.7 28.6

10.2 18.0 4.0 27.0

10.7 21.8 7.2 24.5

10.8 23.7 8.1 24.0

9.3 25.9 10.7 16.2

7.6 25.1 9.4 17.0

17.6 9.6 0.3 1.2

13.3 11.8 1.9 1.6

18.5 7.2 0.2 1.1

16.2 7.2 0.2 0.8

18.4 4.7 0.3 0.6

11.7 3.7 0.2 0.6

12.6 3.5 0.2 0.7

Other regions

13.2

15.1

11.3

12.0

11.1

14.6

13.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Total

Source: China Statistical Bulletin of Foreign Economic Relations, annual; and China Statistical Handbook, annual; and authors’ calculation.

same shares, in 2004 big differences occurred. The Yangtze River Delta region received 42.1 percent of inward FDI in China in 2004 (see Table 5.15). After the policies of reform and opening up to the outside world, China has recorded high speed economic growth. Particularly since the 1990s, growth rate in the Yangtze River Delta region (Shanghai, Jiangsu province and Zhejiang province) was extremely high. The ratios shared by the Yangtze River Delta region in macroeconomic indicators in China therefore have become higher year after year. The reason why inward FDI has been concentrated in the Yangtze River Delta region is mainly due to the advantages of the region specified earlier.

2004

Yangtze Yangtze Yangtze River River River Shanghai Jiangsu Zhejiang Delta Shanghai Jiangsu Zhejiang Delta Shanghai Jiangsu Zhejiang Delta 8.82

6.03

19.05

4.9

9.4

6.5

20.8

5.4

11.3

8.2

24.9

Primary industry Secondary industry manufacturing Tertiary industry

0.51 4.94 5.26 5.52

7.07 9.51 9.98 8.87

4.67 6.43 6.60 6.30

12.26 20.88 21.84 20.69

0.6 4.8 5 7.4

6.9 9.7 9.7 10.3

4.4 2.2 7.5 6.8

11.9 16.7 22.2 24.4

0.5 5.2 5.6 8.2

6.3 12 12.3 12.3

3.9 8.4 8.6 10

10.7 25.6 26.4 30.5

Retailing amount Fixed investments

4.70 7.24

8.00 8.39

6.77 6.78

19.47 22.41

6.2 5.1

9.2 7.7

6.3 6.7

21.7 19.5

4.4 4.6

9.3 7.7

8.2 6.8

21.8 19

Trade Export Import

8.67 8.71 8.63

5.81 6.58 4.94

4.10 5.17 2.89

18.58 20.47 16.45

10.7 9.6 12

8.7 9.4 7.8

5.1 6.6 3.3

24.4 25.6 23.1

13.9 12.4 15.4

14.8 14.7 14.9

7.4 9.8 4.8

36 36 35.1

FDI(pledged) FDI(actual)

5.87 8.66

14.21 12.74

3.56 3.35

23.64 24.76

10 7.6

16.9 15.9

5.2 3.8

32.1 27.2

9.6 10.4

25.1 14.8

9.4 9.5

42.1 34.6

Budget income Budget expenditure

7.35 5.38

5.78 5.25

3.91 3.73

17.05 14.37

12.2 4.1

5.9 4

4.2 2.6

22.3 10.8

13.6 4.9

9.6 4.6

6.8 3.7

30.1 13.2

(Continued )

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Table 5.16 Ratios of the Yangtze River Delta to the whole of China (1995–2004)

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1995

1999

2004

1.08

1.45

1.40

1.9

1.1

1.4

1.47

1.8

1.1

1.5

1.47

2.69

1.56

1.88

2.04

2.5

1.6

1.8

1.97

2.4

1.6

2

2.00

Population (10,000)

1.074

5.834

3.608

10.52

1.35

5.85

3.67

10.95

1.3

5.66

3.55

Land area (10,000 km)

0.066

1.069

1.06

0.06

1.1

1.1

2.19

0.06

1.1

1.1

2.195

10.6 2.19

Source: JETRO Shanghai Center, China Statistical Yearbook, annual; Shanghai Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual; etc. Note: Per Capita Income means Whole China being 1.

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Per capita income (Urban) Per capita income (Rural)

Development Strategies and Income Disparities in China

Yangtze Yangtze Yangtze River River River Shanghai Jiangsu Zhejiang Delta Shanghai Jiangsu Zhejiang Delta Shanghai Jiangsu Zhejiang Delta

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Table 5.16 (Continued )

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We can find from Table 5.16 that in 1999–2004 the ratio shared by each province, city, and the whole region of the Yangtze River Delta display significant growth. Also with regard to indicators on export, import and inward FDI, their growth rates are high enough. In 2004, for example, with around 10 percent population of the whole China, they occupied 24.9 percent of national GDP, 36 percent of national trade and 34.6 percent of FDI (actual). This shows that the Yangtze River Delta region is becoming a center of China’s economy and trade. As a matter of fact, the Yangtze River Delta region exceeded Guangdong province12 in its FDI and trade in 2002–2003. The economy of the Yangtze River Delta region has been still in 2005, going into a high growth rate orbit. It also seems that both inward FDI growth and trade increase have contributed the region’s economic expansion. With regard to income disparity, compared with national average, in 2004 Shanghai’s ratio of urban area increased by 0.12 over 1995, but rural area decreased by 0.25. In Jiangsu province, on the contrary, the ratio remained the same. More income growth was from Zhejiang province, in which both ratios of urban and rural areas increased (from 1.4) to 1.5 and (from 1.8) to 2.0 respectively, especially increment from 1999 to 2004 was remarkable. As shown later in this chapter, what contributed to the growth in Zhejiang province was mainly private enterprises, not foreign capital. Inward FDI in Zhejiang province increased, but less than in Shanghai and in Jiangsu province (see Table 5.16). The main contribution of biggest trade surplus in Zhejiang province was by private enterprises and not by foreign capital.

4.3. Inward FDI in Yangtze River Delta region and formation of subregional characteristics The shares of export occupied by state-owned, foreign-owned and other (mainly private-owned) enterprises are as follows: in 1999 and 2004 respectively, state-owned share was 50.5 percent and 12

Guangdong is the first province which had adopted market economy.

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25.9 percent, foreign-owned was 45.5 percent and 57.1 percent, other (mainly private-owned) was 4.0 percent and 17.0 percent. With regard to share of import of state-owned in 1999 and in 2004 respectively was 44.8 percent and 31.4 percent, foreign-owned was 51.8 percent and 57.8 percent, private-owned was 3.4 percent and 10.8 percent. As the figures show, the share of state-owned decreased, but the shares of both foreign-owned and private-owned rapidly increased. As mentioned before, FDI accumulation in Yangtze River Delta region has been extremely high. What seems to be interesting is that each province and municipality in the Yangtze River Delta region shows its own development pattern respectively. That is to say, in Shanghai, they have reformed state-owned enterprises through foreign capital and have attempted outward FDI by purchasing foreign enterprises. Jiangsu province had the largest (actual) inward FDI region all over China in 2003, and had been the most active FDI receiving province, and Zhejiang province had the most privateowned enterprises in China. One of the main aims of this chapter is to investigate reasons for the above-mentioned characteristics in each province and municipality.

4.3.1. Shanghai: Government led grafting strategy toward market-oriented economy (1) General view and the economy of Shanghai Shanghai municipality is located next to north and south of Jiangsu province and Zhejiang province, and is between the mouth of Yangtze River in the north and Hangzhou Bay in the south. It is also on the alluvial plain of the Yangtze River Delta, protruding into the East China Sea. It is 6,340.5 square kilometers in area and occupies 0.06 percent of whole China. The longest East-West distance is around 100 kilometers, and the longest North-South distance is around 120 kilometers. Administrative divisions have 18 districts and one county.

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The population of Shanghai was 17,169,000 in 2003, of which population with household register was 13,418,000. Non-agricultural population by the end of 2002 was 10,188,000, which amounted to 76 percent. The average life expectancy of these people was 79.52. Economic growth rate in Shanghai suffered from the Asian crisis and decreased to between 10 and 11 percent in 1998 from 12.7 percent in 1997. The average annual growth rate from 1991 to 2003 equaled 11.9 percent, which means it maintained a two-digit growth rate for 11 years, which is higher than the national average growth rate of China. The GDP of Shanghai municipality in 2003 was 625 billion yuan (11.8 percent more than previous year) and its per capita GDP was 46,582 yuan (about US$5,628, 11.2 percent more than previous year). The GDP level of each sector was as follows: primary sector was 9.30 billion yuan (1.5 percent), secondary sector 313.07 billion yuan (50.1 percent) and tertiary sector 302.71 billion yuan (48.4 percent). Of the secondary sector, as for manufacturing production, electronic equipment, telecommunications equipment, transportation machinery, electric machinery, metalworking and chemical products were ranked higher. As for number of enterprises, metalworking, machinery, accessories and textile industries have many enterprises. As for the GDP of the tertiary sector, retailing and restaurant, finance and real estate shared higher rankings. In 2004, the six major sectors which are finance, retail and restaurants, real estate, transportation; storehouse; postal service, telecommunication services; software development and hotel facilities occupied around 40 percent of GDP in Shanghai. Their highest growth rate in value-added was held by finance which was 10 percent, followed by retailing and restaurant (8.2 percent). The real estate’s share of GDP had rapidly increased from 0.5 percent in 1990 to 8.4 percent in 2003. During 1990–2004, annual average growth rate of value added in secondary sector reached 12.3 percent and the tertiary sectors 12.7 percent. The respective ratio of primary, secondary and tertiary sectors in Shanghai changed from 4.3:63.8:31.9 in 1990 to 1.3:50.8: 47.9 in 2004 (see Table 5.17). Also, the ratio of the three industries

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Table 5.17 Industrial structure of Shanghai, Jiangsu and Zhejiang

Shares to GDP (percent) Province City

Shares to Industrial Production (percent)

Year

Primary

Secondary

Tertiary

Light Industry

Non-StateOwned Sector

Shanghai

1949 1952 1978 1980 1985 1990 1995 1998 2000 2003 2004

— 5.92 4.03 3.24 4.18 4.31 2.5 2.13 1.83 1.49 1.3

— 52.43 77.36 75.7 69.77 63.81 57.25 50.08 47.54 50.09 50.8

— 41.65 18.61 21.06 26.05 31.88 40.24 47.79 50.63 48.43 47.9

88.2 79.1 49.3 52.6 55.6 51.54 45.47 44.12 41.34 30.33 28.61

85.25 73.33 8.82 12.65 22.47 36.4 62.08 76.88 82.56 91.01 93.19

Jiangsu

1950 1952 1978 1980 1985 1990 1995 1998 2000 2003 2004

— 52.65 27.57 29.47 30.02 25.07 16.46 14.11 12.01 8.88 8.5

— 17.62 52.6 52.35 52.09 48.89 52.67 50.56 51.68 54.47 56.5

— 29.73 19.84 18.18 17.89 26.03 30.87 35.33 36.3 36.65 35

94.42 93.89 52.4 57.28 53.27 54.65 48.8 51.9 43.2 36.32 33.2

37.21 31.88 38.54 42.69 58.88 65.69 78.62 85.11 87.3 92.09 92

Zhejiang

1950 1978 1980 1985 1990 1995 1998 2000 2001 2003 2004

67.57 38.06 35.96 28.98 25.06 15.88 12.66 11 10.3 7.8 7.2

9.76 43.26 46.79 46.53 45.45 52.04 54.32 52.74 51.27 52.5 53.8

22.68 18.68 17.25 24.49 29.48 32.07 33.02 36.26 38.43 39.7 39

89.67 60.18 62.37 62.47 65.2 62.73 62.24 54.12 55.46 51.7 46

11.28 38.66 43.56 62.83 68.79 86.14 89.01 91.85 93.84 94.9 96.2

Source: China Statistical Yearbook, annual; Shanghai Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual; etc. and authors’ calculation.

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on employment structure was 11.1:59.3:29.6 in 1990 and 8.0:37.8: 54.2 in 2004, which showed increased employment in the tertiary sector. (2) Characteristics of international trade in Shanghai The following characteristics have been recognized of international trade in Shanghai as shown in Table 5.18. First, the growth rate of trade has been very high. In 2004, trade amount in Shanghai reached US$160 billion (42.4 percent more than previous year), of which the export amount was US$73.5 billion (51.6 percent more) and the import amount was US$86.5 billion (35.3 percent more). Import surplus therefore equaled US$13.0 billion in 2004. Second, changes in the structure of export goods can be easily recognized. High technology products and machinery and electric products occupied larger shares. In 2003, US$16.4 billion of high technology products were exported (120 percent more than the previous year) and US$29.3 billion of machinery and electric products (73.8 percent more). This amounted to 33.7 percent and 60.3 percent respectively. Third, foreign capital contributed highly to the export amount. Export amount by foreign capital in Shanghai was US$30.8 billion (60.8 percent more than the previous year) which shared 63.6 percent of export total and whose growth rate was 9.6 percent more than that of Shanghai municipality average. Of the increasing export amount in 2003, foreign capital comprised 71 percent. Export amount of state-owned enterprises was US$15.2 billion (26.1 percent more than the previous year) which shared 31.3 percent. On the contrary, the share of private enterprises remained small at 5.1 percent (whose amount was US$1.8 billion but rapidly increased to 455.1 percent more than the year before). Fourth, export markets have become pluralistic. In 2004, the amount exported to Asia was US$32.5 billion (49.3 percent more than previous year), to the EU US$16.8 billion (58.3 percent more), to North America US$19.3 billion (51.5 percent more), to South America US$2.1 billion (45.3 percent more) and to Oceania US$1.6 billion

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Table 5.18 Details of exports from Shanghai (1999–2003; percent) 1999

100

15

Share 100

Growth Rate 35

Share 100

2002

Growth Rate 9

Share 100

2003

Growth Rate 16

Share 100

Growth Rate 51.2

10.9 −21.6 13.3 15.2 93.6 31.9 21.8

50.9 9.1 2.2 24 4.2 18 3.7

37 43.2 51.2 32.6 66.8 37.7 25.7

50.2 9.5 2.2 23.1 3.7 19.5 4.5

7.5 13.9 7.6 5.1 −4.2 17.9 30.8

50.5 9.7 2.7 21.8 3.6 17.9 3.8

16.5 19 4.1 9.6 14.4 7 −1.5

44.9 9.3 2.9 18.1 3.1 21.9 4.4

34.7 45.1 61.8 25.2 27.8 84.5 73.1

USA

23.1

22

22.2

29.4

21.3

4.9

22.8

24.2

24.7

63.8

State-owned Foreign-owned Others

44.9 55.1 0

4 25.9 —

42.1 56.2 1.7

26.7 37.8 —

40.6 57.8 1.6

5.1 11.9 —

37.4 59.8 2.8

6.9 20.1 —

31.3 63.6 5.1

2.6 60.8 —

Agricultural products Chemical products Clothing and textiles General equipment Electrical equipment Others

2.5 5.2 30.2 3.5 13.9 44.6

−8.3 −0.6 10.9 14.5 63.8 11.2

2 4.9 28 3.6 14.9 46.6

8.2 25.3 25.3 39.3 44.2 40.9

1.7 4.8 25.8 4.3 13.7 49.6

−8.1 8.1 0.6 27.1 0.4 16.2

1.5 5.1 24.5 5.1 15.5 48.2

3 22.5 10.1 40.3 31 12.7

1.1 4.2 20.1 5 14.2 55.3

8.2 25.6 24.3 47.7 38.2 73.6

163

Source: JETRO Shanghai Center, Shanghai Statistical Yearbook, annual, etc.

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Asia Hong Kong Taiwan Japan South Korea Europe Germany

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Export Total

Growth Rate

2001

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Share

2000

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(59 percent more). Export amount varied from one area to another, but increasingly showed positive growth for all areas. Generally speaking, Japan, USA, Germany and Hong Kong have been major countries for international trade in Shanghai, whose total amount was 48.6 percent in 2003. USA and Hong Kong had a trade surplus with Shanghai, while Japan and Germany had a trade deficit. Fifth, both ordinary and improvement trade have gone up, and the main one has been the improvement one. In 2003, the ratio of ordinary trade was 40.1 percent and it amounted to US$19.4 billion (41.6 percent more than the year before), and the ratio of improvement trade was 57 percent and this amounted to US$27.6 billion (58.6 percent more). Of the improvement trade, the export amount of raw materials equaled US$4.4 billion (18.9 percent more) and the export amount of local materials was US$23.2 billion (69.2 percent more). Increase in export of local materials seemed to indicate the progress of technology level and industrial accumulation in China. Expansion of main trade items like machinery and electric products were chiefly due to improvement trade. Of the traditional export items, a higher ratio was occupied by the clothing and spinning industry, whose growth rate compared with previous year were 22.8 percent and 28.5 percent respectively, but whose share of total export amount decreased (from 30.2 percent in 1999 to 20.1 percent in 2003). (3) Combination strategy of foreign capital and state-owned enterprises: Expansion of grafting strategy towards a marketoriented economy Shanghai was in the distinctive features of heavy industry and stateowned production base from the 1950s to the 1980s. However, since the 1990s the industry promoting policy known as the “Shanghai New Industrial Upland Building” (building projects of more advanced industry base than areas around) had been implemented. It could be classified as reforming and adjusting the “traditional industry,” and as choosing and promoting the “key industry for Shanghai” (of leading industry based on heavy industry), “Shanghai High-Tech industry”

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and “urban type industry for Shanghai.” The industry allocating pattern of what is called “1 + 3 + 9”13 had also been done, which means that inviting large-scale foreign enterprises, as well as reorganizing a great variety of state-owned enterprises into more specific groups for concentrating them in industry development zones have been planned to have advantages of industry accumulation. The above was a project submitted at the Ninth Five Year Plan in order to establish industry accumulation zones with special characteristics. Its basic plan has been to concentrate the location of new industry projects on the “1 + 3 + 9” areas and also to accumulate other manufacturing enterprises into suburban industrial zones. Specific examples are as follows: (1) large-scale manufacturings have been accumulating at Jinqiao Export Processing Zone, (2) enterprises and R&D centers specific to biomedical and IT related industries have accumulated at Zhangjiang High-Tech Park, (3) accumulations with special characteristics, in terms of regional industrial development and infrastructure condition, have been progressing at nine places of development zones like Songjiang, Qingpu, “1 + 3 + 9” indicates as follows: “1” shows Pudong New Area (Zhangjiang High-Technology Park, Waigaoqiao Free Trade Zone, Jinqiao Export Processing Zone, etc.), which means accumulated zones of urban style industries, of computer related, bio-related, automobile related and electronic products related industries. “3” points out the following three development zones: (1) Caohejing High-Technology and Engineering Development Park (accumulation of information related, high-technology related), (2) Minhang Economic and Technological Development Zone (of electric and electronic goods related and of medical supplies related), (3) Shanghai Chemical Industry Zone (of new material related and of petrochemical industry related). “9” indicates the following nine development zones directed by Shanghai local government: (1) Shanghai Municipality Overall Industrial Development Zone (originally Fengpu Industrial Area) (accumulation of machine processing and of medical supplies related, etc.), (2) Xinzhuang Industrial Zone (for development of industrial zone considering environment friendly and high value added ones, and accumulation of electric and electronic goods related, of telecommunications equipment related, of new materials related, etc.), (3) Jiading Industrial Zone (of transportation equipment particularly automobile parts related), (4) Baoshan Industrial Zone (of new material related, etc.), (5) Kangqiao Industrial Zone (of automobile parts related, etc.), (6) Songjiang Industrial Zone (of electric and electronic goods particularly manufacturing export related sectors, etc.), (7) Qingpu Industrial Zone (of clothing, of biotechnology and of automobile parts related, etc.), (8) Jinshanzui Industrial Zone (of chemical industry related, of machine products related, of building materials related, etc.) and (9) Chongming Industrial Zone (of agricultural products and food industry products, of ship repairs related, etc.). (On the “1 + 3 + 9”, see also Chapter 3.)

13

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and Jiading which are located in the suburbs, and (4) tertiary sector accumulation of industries such as finance and service has been progressing at Lujiazui zone. The concrete policy measure has been to conclude strategic partnerships with reorganizing enterprise groups and industry zones, and to establish long-term cooperation in order to decide industry zone as special characteristic industries and to decide enterprise groups as production bases (see Table 5.19). Other measures we can point out have been (1) to have complementary relations of Shanghai municipal government with each district government in order to realize the “1 + 3 + 9” industry allocation, (2) to support with policy measures like tax system, statistical information, project adjustment, administration system clearly written at “Provisional Administration Measures for Industrial Zones in Shanghai municipality” by the Shanghai Economic Committee. These new industry allocation policies seem to be closely related with economic reinforcement of each district and county in Shanghai. For example, export amount of the above development zones in Shanghai in 2003 reached US$28.2 billion (63.5 percent more than previous year) whose growth rate was higher by 12.3 percent than overall Shanghai growth rate. Its total share of export to Shanghai municipality was 58.3 percent. Eighteen districts and one county, except Luwan district recorded their export amount to be more than US$100 million, of which districts and county with more than US$1 billion exports increased from five in 2002 to six in 2003. They were (from the top amount) Pudong New District, Songjiang, Qingpu, Jiading, Minhang, and Baoshan. The highest growth rate was occupied by Songjiang (213.5 percent more than the year before and US$7.3 billion) which was followed by Pudong New District (59.8 percent more and US$9.5 billion) and Jiading District (41.9 percent more and US$2.4 billion). In Shanghai, state-owned enterprises have been reformed by foreign capital and by merger and acquisition and have been led to outward FDI activities, which can be recognized as grafting strategy. We easily list several examples as follows: Shanghai Friendship Group Incorporated Enterprise, Hualian Group, etc., were integrated into Shanghai Bailian Group, which had participated with capital in Price

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Table 5.19 Long-term cooperation relationships between Shanghai industrial zones and state-owned enterprise groups Industrial Zones

State-owned Large-scale Enterprise Groups in Shanghai

Waigaoqiao Free Trade Zone

Shanghai Electric, Shanghai Textile, Shanghai Material Group Company, SVA, Shanghai Building Materials, Shanghai Aviation Industry Shanghai Automotive Industry Group, Shanghai Electronics Development Holding Group, SVA, Shanghai Aviation Industry Changjiang Computer Group, Shanghai Pharm, Shanghai Electronics Development Holding Group Shanghai Textile Holding Group, Shanghai Pharm, Shanghai Light Industry Shanghai Light Industry

Jinqiao export processing zone Zhangjiang hightechnology Xinghuo industrial zone Minhang Economic and Technological Development Zone Caohejing hightechnology industrial zone Shanghai chemical industry zone Congming industrial zone Baoshan industrial zone Jiading industrial zone Qingpu industrial zone Songjiang industrial zone Xinzhuang industrial zone Jinshanzui industrial zone

Changjiang Computer, Shanghai Electronics Development, SVA, Shanghai Aviation Industry Huayi, Shanghai Materials, Shanghai Petroleum & Chemical Corporation, Shanghai Gaoqiao Petroleum & Chemical Corporation Shanghai Light Industry, Shanghai Shipbuilding Corporation Shanghai Material, Shanghai Nonferrous Materials, Baosteel Shanghai Automotive Industry, Shanghai Electric, Shanghai Material, Guangdian Shanghai Automotive Industry Group, Shanghai Electric, Huayi Shanghai Electric, Shanghai Pharm, Shanghai Electronics Development, Guangdian Shanghai Automotive Industry Group, Shanghai Electric, Shanghai Pharm, Shanghai Light Industry, SVA, Shanghai Aviation Industry Shanghai Pharm, Shanghai Petroleum & Chemical Corporation (Continued )

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Industrial Zones

State-owned Large-scale Enterprise Groups in Shanghai

Kangqiao industrial zone Shanghai municipality overall industrial development zone

Shanghai Electric, Shanghai Textile, Shanghai Building Materials Shanghai Automotive Industry, Changjiang Computer, Shanghai Electric, Shanghai Textile, Shanghai Electronics Development, Shanghai Light Industry, SVA, Shanghai Building Materials

Source: Shanghai Economic Committee (ed.), Research on Industrial Reform and Development in Shanghai, 2001.

Smart (USA), and Shanghai Automotive Industry Corporation took over Ssangyong Motor (ROK), and Huayuan Group (the largest spinning enterprise in China), Shanghai Baosteel Group Corporation (steel enterprise) and Jingjiang International Group (the largest hotel and travel agent), etc., have been attempting to be multinational corporations. Shanghai Baosteel Group Corporation, for example, established a joint venture with Nippon Steel Corporation (Japan) and Arcelor (Luxembourg) in December 2004, whose respective share of investment was 50 percent, 38 percent and 12 percent with total investments amounting to US$6.5 billion. For NSC and Arcelor, local production in China contributes to expansion of their supply capacity for China’s domestic steel market. Generally, large-scale state-owned enterprises which have attempted improvement of technological development by rich financial capacity are quite active for outward FDI. As with the case of taking over Ssangyong Motor by Shanghai Automotive Industry Corporation, we expect a future tendency of purchasing foreign enterprises which have excellent technology but poor managerial resources. Inward FDI in Shanghai in 2004 has kept increasing as in 2003. Number of cases was 4,334 (43.9 percent more than previous year) and the amount pledged reached US$11.7 billion (10.54 percent more) which meant more than US$10 billion as in 2003. Of the total investment projects, big projects between US$10–30 million numbered 213 (63.85 percent more) and big projects of more than

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US$30 million 64 (the same as the year before). They have manufacturing (175 cases), real estate (29) and others (22). Table 5.20 indicates number of projects and investment amounts in Shanghai in 2003. With regard to accumulation in each sector, manufacturing occupied the largest position of 64.8 percent. The tertiary sector reached US$3.7 billion (93.6 percent more than previous year) whose amount rapidly increased though the share shrank to be 33.8 percent (0.2 percent less than the year before). Breakdown of industry points out real estate to US$1.27 billion, trade and restaurant to US$0.28 billion, transportation and telecommunication to US$0.19 billion, etc. Also, a breakdown of counties and regions indicates Hong Kong rapidly increased to US$2.0 billion in 2003 compared to US$0.78 billion in 2001 (both were pledged).

Table 5.20 Project numbers and investment amounts of inward FDI in Shanghai Project Number (case)

2003

Pledged (US$100 million)

Actual (US$100 million)

Accumulated Accumulated Accumulated (till 2003) 2003 (till 2003) 2003 (till 2003)

Total

4,321

32,061

110.64

744.37

58.50

462.65

Of which Primary Secondary manufacturing Tertiary

14 1,941 1,896 2,366

215 19,489 18,771 12,357

0.46 73.16 71.67 37.02

2.60 466.91 455.16 274.86

0.12 25.01 24.59 33.37

0.94 240.37 237.29 221.34

864 427 788 279 103 65 69 468

10,150 4,289 4,377 1,602 527 459 558 3,968

20.28 8.27 12.73 6.14 2.75 1.13 0.44 8.51

182.66 36.56 88.00 42.53 34.10 17.68 5.29 81.77

14.96 4.21 11.03 2.05 2.14 2.58 0.18 5.77

135.90 25.26 62.62 19.45 17.29 12.28 2.54 55.68

Country and Region Hong Kong Taiwan Japan Singapore Germany UK Canada USA

Source: Shanghai Statistical Yearbook (2004), etc.

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General trend shows that Asian origin FDIs have been still major for Shanghai occupying around 50 percent to the total FDI in Shanghai though its share slightly decreased, while shares of the USA and Europe increased. As far as the way of investment is concerned, 100 percent investment cases have taken major positions (sharing 80 percent of newly invested enterprises) and also purchasing by foreign enterprises has become a new way of FDI. Management of foreign enterprises seems to be by and large satisfactory. Sales volume in 2003 amounted to US$788.2 billion (33.9 percent more than the previous year), and profits of US$43.7 billion (53.9 percent more), tax payment of US$30.0 billion (26.5 percent more), export amount of US$30.8 billion (60.8 percent more) which shared 63.6 percent of overall Shanghai export. As of the end of 2004, Shanghai invited 36,300 projects from 116 countries and regions whose stock value amounted to US$86.2 billion (pledged) and US$52.8 billion (actual). However, we should mention some disadvantages on inward FDI in Shanghai. First, compared with other areas, costs like labor costs have been rapidly increasing. For example, annual average per capita income in Shanghai in 2003 was 27,304 yuan (monthly average was 2,275.3 yuan), which was the highest among provinces and direct controlled municipality under control government.14 While GDP and labor costs increased, the number of unemployed workers and unemployment rate slightly increased (2.7 percent in 1995 and 4.9 percent in 200315). The main reasons for this seem to be (1) labor population is expected to increase till 2034, (2) employment absorption has been decreasing,16 (3) many workers were made redundant17 as a result of restructuring of traditional industries since the 1990s, etc.

14

Public Information on Shanghai National Economy and Social Development Statistics, 2003. See Shanghai Statistical Yearbook and Public Information on Shanghai National Economy and Social Development Statistics, 2002. 16 Chugoku no Kokusai Kyousouryoku to Shakaikouzou no Henka (International Competitiveness in China and its Change of Social Structure), (JETRO International Research Division, March 2003). 17 Chen (2004). 15

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Second, with regard to the ratio of inward FDI into the tertiary sector, it has been comparatively small (industrial breakdown of FDI in 2003 shows manufacturing 64.8 percent, primary sector 0.4 percent, and transportation and telecommunications, retailing and restaurant, real estate of tertiary sector indicates 3.5 percent, 3.9 percent and 9.4 percent respectively18). As mentioned earlier, since the 1990s Shanghai has been planning to become a “center of international business, finance, trade and distribution.” Needless to say, realizing such a goal basically requires the development of the tertiary sector. Small shares of inward FDI into tertiary sectors, however, predicts Shanghai is not attractive enough for foreign investors. Third, inward FDI into the manufacturing sector has also suffered from competition with neighboring provinces and cities. As a matter of fact, as we could see a shifting tendency of manufacturing from Shanghai to neighboring areas even partially, it would be necessary to establish “Shanghai New Industrial Upland”19 to have a strategy with more efficient management and more accumulation of advanced factors. Under the omnidirectional development strategy in the 1990s, to which the priority of regional development strategy in the 1980s changed, emphasizing adjustment of industrial structure and activation of state-owned enterprises, eliminating discriminatory regional advantageous policy and advantage of cheap labor, it is necessary to become independent to obtain a competitive advantage. 4.3.2. Jiangsu province: Largest inward FDI accepted region in China (1) General view and the economy of Jiangsu province Jiangsu province is located at the downstream of the biggest river in China, Yangtze River, and in its northern part, Huaihe flows east and west. Also, the Jinghang Canal flows through north and south of its province. It has a flat landform and many rivers and lakes. Of the total 18

Shanghai Statistical Yearbook, 2004. Since 1996, the Shanghai municipal government has taken the plan of “building new industrial uplands.” 19

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space, 17.3 thousand square kilometers are occupied by lakes, marshes and rivers which show the biggest share in China to be 16.9 percent. With regard to transportation, airports are located in Nanjing, Changzhou, Nantong, Lianyungang, Xuzhou, Yancheng, and harbors in Lianyungang, Zhangjiagang, Nantong, Nanjing, Zhenjiang, Jiangyin, Yangzhou, Gangang, Changshu, and Taicang. The population has been growing for the last 10 years. However, as the natural growth rate of population has gradually decreased till 2003, we predict that there has been population inflow from other regions. The area of Jiangsu province is 102.6 thousand square kilometers, which occupies 1.1 percent of China. It has the following 13 administrative divisions: Nanjing city, Zhenjiang city, Changzhou city, Wuxi city, Suzhou city, Yangzhou city, Nantong city, Lianyungang city, Yancheng city, Huaiyin city, Suqian city, Taizhou city and Xuzhou city. Economic growth rate of Jiangsu province recorded 10–11 percent for the last 10 years, which is higher than the national growth rate of China. Industrial structure in GDP displays a decreasing tendency in the primary sector and an increasing tendency in the secondary and tertiary sectors. In 2003, for example, the production of the primary sector was 110.7 billion yuan (1.4 percent less than previous year, the second rank in China), the secondary sector 678.2 billion yuan (17.2 percent more than the year before, the second rank in China) and the tertiary sector 456.3 billion yuan (11.7 percent more, the second rank in China), whose total was 1,245.2 billion yuan (13.5 percent more, the second rank in China after Guangdong province). Per capita GDP of Jiangsu province in 2003 was 16,796 yuan (around US$2,029), which was the sixth rank in China.20 The share of each sector in 2003 was 8.9 percent primary sector, 54.5 percent secondary and 36.6 percent tertiary, which indicated that secondary had more than half of the total. In comparison with Shanghai and Zhejiang provinces, the share of the primary sector was a little higher, and the tertiary sector was a little lower. We enumerate representative sectors in Jiangsu province in the secondary sector as spinning, 20

Public Information on Jiangsu Province National Economy and Social Development Statistics, 2003.

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electronic communication, equipment manufacturing, chemical raw materials and manufacturing, electric machine, clothing, and in the tertiary sector as wholesale, retailing and restaurant, transportation and telecommunications. (2) Inward FDI in Jiangsu province Due to recent high rates of economic growth, inward FDI in Jiangsu province has increased. Compared with Guangdong province, for example, in 1993 inward FDI (actual) in Jiangsu province was 40 percent of Guangdong province; however, in 2003 Jiangsu province’s inward FDI reached US$15.8 billion (actual and 52.4 percent more than previous year) which became more than inward FDI in Guangdong province, US$15.6 billion and 18.8 percent more than the year before. With regard to the inward FDI of Jiangsu province, its southern region (Suzhou city, Wuxi city, etc.) occupied around 90 percent. For example, FDI in Suzhou city reached US$6.85 billion (actual, 41.4 percent more than previous year) and Wuxi city US$5.08 billion (actual, 72.6 percent more). Particularly, Suzhou city’s inward FDI has become more than Shanghai municipality’s in 2003. Its successful FDI inflow seems to be coming from (1) Shanghai as a big market adjoining the land, (2) accumulation advantage in parts production, and (3) center of distribution in Yangtze River Delta region, etc. Presently, there are around 6,000 foreign enterprises in Jiangsu province (including 900 Japanese-owned enterprises) which are concentrated in three places, i.e. China-Singapore Suzhou Industrial Zone, Suzhou National New and High-Tech Industrial Development Zone (Suzhou High-Tech Area), and Kunshan Economic and Technology Development Zone. The most developed ChinaSingapore Suzhou Industrial Zone had received 1,558 foreign enterprises (as of June 2004) and 6,604 Chinese enterprises. (3) International trade of Jiangsu province International trade volume of Jiangsu province in 2003 amounted to US$113.67 billion (61.7 percent more than previous year), of which

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export was US$59.14 billion (53.7 percent more) and import was US$54.53 billion (71.3 percent more). It meant US$4.61 billion trade surplus. Of the export amount, foreign enterprises contributed US$41.13 billion (69.6 percent more) which shared 69.5 percent of the export total. As for export goods, manufacturing products amounted to US$58.01 billion (54.6 percent more than previous year) whose share was 98.1 percent. High growth rate export goods were semiconductor, integrated circuit, electronic and electric products like digital equipment. Main export items were machine products and electric products whose amount reached US$37.29 billion (75.9 percent more) and whose share was 64.3 percent, also high-technology products export was US$22.85 billion (88.5 percent more) and its share was 39.4 percent. Geographical breakdown of exporting countries and regions in 2003 points out that exports to Japan increased to US$10.1 billion from US$7.6 billion in 2002, exports to the USA increased to US$12.72 billion (from US$8.2 billion in 2002), exports to the EU increased to US$12.74 billion (from US$7.2 billion). Also, exports to Hong Kong grew to US$5.9 billion (from US$3.28 billion).21 Their share of export to Europe was 24.1 percent (75.6 percent more than the year before), the USA 21.5 percent (55 percent more), Japan 17.1 percent (32.9 percent more). Both shares and growth rates of export to Europe and the USA recorded high (see Table 5.21). Exports from Jiangsu province were contributed by foreign enterprises whose share was 69.6 percent. It was much higher than state-owned enterprises’ 20.6 percent and others’ (private enterprises) 9.8 percent. Moreover, growth rate of export by foreign enterprises reached around 70 percent. With regard to export items, machinery and electric products have overtaken clothing and textiles since 2000. The growth rate of machinery and electric products came up to 75.4 percent which would grow more in the future. A share of precision instruments was still low but its export growth rate was 21 Public Information on Jiangsu Province National Economy and Social Development Statistics, 2003.

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Table 5.21 Details of export from Jiangsu province (1999–2003; percent)

100

17

Share 100

Growth Rate 40.7

Share 100

2002

Growth Rate 12.1

Share 100

2003

Growth Rate 33.3

Share 100

Growth Rate 53.7

50.3 7.7 2 24.5 4.4

18.2 2.5 16.2 20.5 51.8

51.3 7.9 2.1 24.7 4.1

43.5 43.4 47.4 41.7 30.9

52.1 7.5 2.2 25.4 42

13.8 6.1 15.8 15.2 15.5

48.8 8.5 2.8 19.8 4.4

24.9 52.1 70.6 3.7 39.6

46.7 10 3.2 17.1 3.8

47 80 75.8 32.9 32

Europe Germany

20.5 4.1

6.9 −1.7

20.6 4.1

41.5 39.3

20.4 3.9

10.9 6.4

21.1 4.3

3.7 47

24.1 5.3

75.6 30.8

USA

20.8

22.3

19.4

31.4

18.6

7

21.3

53

21.5

55

State-owned Foreign-owned Others

41.1 53.9 5

10.4 22.4 18.9

38 56.1 5.9

30 46.6 66.3

35 57.6 7.3

3.3 15.2 38.7

27.9 63 9.1

6.1 45.7 64.7

20.6 69.6 9.8

13.5 69.6 66.7

(Continued )

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Export total

Growth Rate

2001

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Share

2000

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1999

175

2001

2002

2003

Share

Growth Rate

Share

Growth Rate

Share

Growth Rate

Share

Growth Rate

4.1 8.3 30.2 6

6.8 12.1 12.8 22

3.3 7.5 29.1 5.5

11 27.9 35.4 28.6

3.3 7.2 28.2 5.1

12 7.4 8.8 3.1

2.5 6.5 24.4 4.5

2.6 20.2 15.4 19.6

1.9 5.5 20.2 3.9

17.7 29.1 27 30.6

28.1

29.3

33.3

67

36.7

23.3

43.6

58.4

49.8

75.4

3.9

−8.6

4.3

55.6

4.4

16.2

4.1

22.3

4

50.2

4.5 15.1

39.2 13.5

3.4 14

69 30.4

2 13.6

−35 8.6

2.4 12.4

60.9 21.2

4.9 9.9

Source: JETRO Shanghai Center, Jiangsu Province Statistical Yearbook, annual, etc.

217.3 27.2

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Agricultural products Chemical products Clothing and textile Nonferrous metals and products Machine and electric products Transportation equipment Precision equipment Others

2000

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1999

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Table 5.21 (Continued )

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217.3 percent in 2003, which is expected to be a promising export sector as well as transportation machine. 4.3.3. Zhejiang province: Model area of growth of private enterprises: Expansion of grass roots strategy towards market-oriented economy (1) General view and the economy of Zhejiang province Zhejiang province has been traditionally well known as a “native place of fish and rice,” a “capital of silk and tea,” a “province of culture” and a “picturesque place for travel.” The area of the province equals to 101.8 thousand square kilometers whose share in whole China is only 1.06 percent. Zhejiang province is one of the smallest provinces. A straight line both of east and west, and of north and south is around 450 kilometers. The landform of Zhejiang province is so complicated that mountainous and hilly areas occupy 70.4 percent of the total area, plains and basins 23.2 percent, and rivers and lakes 6.4 percent. The area of arable land is only 2.08 million hectares whose landform has been by tradition called as “70 percent mountain, 10 percent water, 20 percent rice field.” The province is covered by eight river systems like Qiantang River. The sea area of Zhejiang province equals to 260 thousand square kilometers, of which islands more than 500 square meters in area number 3,061. Zhejiang is a province which has the greatest number of islands in China. Zhoushan Island with an area of 495.4 square kilometers, is the fourth largest one in China. The coastline of Zhejiang province which is the longest in China, has a complicated landform (the length of continental coastline reaches 2,200 kilometers and is the fifth longest in China) and many good harbors. The deep coastline where ships of more than 100,000 tons can enter a harbor that stretches 105.8 kilometers. The main harbors of Zhejiang province are Wenzhou, Ningbo, Zhoushan, Haimen, Luhuadao, Huanxindao, Dachendao, Dongtou, Zapu, Jiuhong, etc. The Hangzhou Bay Crossing Bridge, which is under construction, will combine with Shanghai municipality and Ningbo city and will be a highway bridge to cross the Hangzhou Bay. It was planned to be completed at the second half of 2008 and to be opened in 2009.

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When it is completed, it will become the longest marine bridge in the world with a length of 36 kilometers and a width of 33 meters. Its design enables a speed of 100 kilometers per hour and durability of 100 years. When the Hangzhou Bay Crossing Bridge is available, traffic access through the land route between Shanghai and Ningbo will be drastically improved. According to an expert, the distance from Shanghai (Xinzhuang) to Ningbo city will become 179 kilometers (from existing 304 kilometers). The time required will be shortened to around two hours (from existing four hours) by Shanghai-Hangzhou-Ningbo highway which runs through Shanghai, Hangzhou and Ningbo. Zhejiang province has 11 administrative divisions, which are Hangzhou city, Ningbo city, Wenzhou city, Jiaxin city, Huzhou city, Shaoxing city, Jinhua city, Quzhou city, Zhoushan city, Taizhou city and Lisui city. Airports of its province are four: Hungzhou, Ningbo, Wenzhou and Zhoushan. The GDP growth rate of Zhejiang province was maintained at 10–12 percent, and in 2003 it increased to 14.3 percent. The Zhejiang province’s GDP in 2003 was 920 billion yuan (14.3 percent more than previous year and the fourth rank of whole provinces and direct controlled municipalities under government), whose per capita GDP was 19,730 yuan (about US$2,384, the fourth rank). The sectoral breakdown of GDP in 2003 indicated that the GDP of the primary sector was 72.2 billion yuan (2.7 percent more), that of the secondary sector was 483.0 billion yuan (16.6 percent more, the fourth rank in China), and that of the tertiary sector was 364.8 billion yuan (13.2 percent more, the fourth rank in China). Secondary sectors such as spinning, leather goods, food, etc., and the tertiary sector such as retailing, trade, restaurant, transportation, telecommunication, etc. performed well. (2) International trade of Zhejiang province: Active private enterprises Recent trend displays that exports from Zhejiang province have been rapidly increasing, with its trade amount in 2003 recording US$61.4 billion (46.3 percent more than the previous year). Export amount was pointed out as US$41.6 billion (28 percent more) and import as

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US$19.8 billion (57.9 percent more). The trade surplus amount was the largest, both of China’s national and of Zhejiang province’s past record. The breakdown of export indicated machinery and electrical products occupied more than 30 percent of it. As shown in Table 5.22, regional breakdown of Zhejiang province’s export indicated the USA to be the top, followed by Japan though Japanese share has reduced since 1999. Figures in 2003 compared with the previous year show that export amount to Japan increased to US$4.9 billion (from US$4.01 billion in 2002) which meant 22.2 percent more than 2002; export amount to Hong Kong expanded to US$1.91 billion (from US$1.41 billion in 2002) which was 35.2 percent more; exports to the USA grew to US$8.04 billion (from US$5.69 billion) whose growth rate was 41.4 percent; and exports to Europe recorded 45.3 percent growth rate to US$11.75 billion from US$8.09 billion. Moreover in the first half of 2004, exports to ASEAN, India and Russia increased more than 40 percent. Export to the Middle East also grew by 57.5 percent rate to US$2.37 billion which is an expected promising export market. Zhejiang province has strength in its exports; its main player has been private enterprises. The export share of private enterprises in this province shows a drastic increase (more than 60 percent growth rate) leading to 36.7 percent of total export of Zhejiang province in 2003, which was more than 32 percent state-owned and 31.4 percent foreign-owned. It has been totally different from Shanghai municipality and Jiangsu province. (3) Private economies in Zhejiang province Zhejiang province originally had less state-owned enterprises than other provinces and cities. Since industrialization in the 1980s, based on the collectively-owned enterprises at the communes era, they have grown TVEs leading to be known as “Jiangzhe Model.” “Zhejiang Business” has been a famous business group for its well-known activities in Shanghai in the 1930s. It can be said that in Zhejiang province, they traditionally have their own climate which is advantageous for business activities.

2001

2002

2003

Share

Growth Rate

Share

Growth Rate

Share

Growth Rate

Share

100 40.9 7.1 1.3 17.7 3.3 27.5 4.7 18.8 61.8 25.9 12.4

18.4 21.8 −1.1 21.4 23.9 43.3 11.7 10.9 18.6 10.1 24.3 63.9

100 40.7 6.2 1.4 17.1 3.3 27.2 4.5 18.7 55 27.5 17.5

51 50.6 30.4 64.7 45.6 51.2 49.2 42.6 50 34.5 60.7 113.8

100 39 5.2 1.3 16.4 3.4 27.4 4.3 19.1 45.1 30.9 24

18.2 13.3 −0.8 3.6 13.6 20 19.1 12.6 21.2 −3.1 32.7 62.4

100 39.3 4.8 1.3 13.6 4 27.5 4.3 13.3 38.4 31.3 30.4

28 28.8 18.5 31 6.4 50 28.6 29.6 29.3 9 29.6 62.1

100 37.7 4.6 1.3 11.8 3.2 28.2 4.7 19.3 32 31.4 36.7

Source: JETRO Shanghai Center, Zhejiang Province Statistical Yearbook, annual, etc.

Growth Rate 41.5 35.8 35.2 37.2 22.2 13.2 45.3 54.1 41.4 17.8 41.9 70.4

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1999

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Table 5.22 Details of export from Zhejiang province (1999–2003; percent)

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It is not easy to test the significance of cultural factors, and the usual ways to recognize it is by conducting various types of experiments and by questionnaire research. (For example, Vedina, Vadi and Tolmats (2006) had interesting results on cultural factors in Baltic countries through questionnaire research.) Unfortunately in this chapter, it is extremely difficult for us to significantly test through for example experiments, so we approach it by depending on widely known materials which is in this chapter a questionnaire by Forbes. “Ranking of Business Cities in China in 2004” (in Forbes) listed four cities in Zhejiang province of the top 10 cities. These cities were Hangzhou, Ningbo, Wenzhou and Shaoxing (see Table 5.23). The concerned questionnaire said its procedure is as follows: first, 191 cities were chosen from 660 cities in China, and then their ranks were decided from total points with regard to eight indices like “entrepreneurship,” “labor force,” “human resources,” etc. In particular, such indices as entrepreneurship, human resources, etc., were taken as important factors and the above cities in Zhejiang province were highly appreciative of them. What we recognize as important is that the traditionally existing factors (not those introduced by foreign enterprises) in Zhejiang province have been remarkably appreciated.22 Zhejiang province has been the most active province in private sector of the whole of China. In 2004, the GDP in value added of state-owned sector in Zhejiang province was 373 billion yuan (4.7 percent less than previous year) and non-state-owned sector 547 billion yuan (5.0 percent more), whose shares are 40.5 percent and 59.5 percent respectively. 22

Needless to say, it is extremely difficult to be free from arbitrariness in such research. On the research result of Forbes, for example, it might be reasonable to ask the question why Shanghai ranked fourth. According to the 2004 research on “Business Cities in China” (Forbes), rank from the top to the 10th was as follows: 1. Shanghai, 2. Beijing, 3. Shenzhen, 4. Suzhou, 5. Guangzhou, 6. Hangzhou, 7. Dalian, 8. Qingdao, 9. Ningbo, and 10. Chengdu. However, what is important for us is cities in Zhejiang (Hangzhou and Ningbo) are evaluated for their competitiveness and entrepreneurship, whose origin is not based on foreign countries but on their traditional culture and climate.

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Transition, Regional Development and Globalization Table 5.23 Ranking of business cities in China

Rank 1 2 3 4 5 6 7 8 9 10

City

Total Population (10,000)

Per Capita GDP (2004, yuan)

Per Capita Income (2004, yuan)

Hangzhou Ningbo Dalian Shanghai Wenzhou Beijin Suzhou Wuxi Shaoxing Shenzhen

629.14 543.35 589.4 1711 739.12 1492.7 590.97 442.54 434.72 557.41

39,174 38,858 33,285 55,306 16,475 (03) 22,107 57,992 52,825 30,254 54,500 (03)

14,545 15,882 10,378 16,683 11,936 (03) 11,405 14,451 13,588 15,676 25,936 (03)

Source: Forbes, 2004 and Statistical Yearbook of each city. Note: In Wenzhou and Shenzhen, both per capita GDP and per capita income were in 2003.

(4) Inward FDI in Zhejiang province Needless to say, although Zhejiang province has been behind Jiangsu province in terms of inward FDI, we understand inward FDI accumulation has been moving ahead in Zhejiang accompanied by recent rapid establishment of physical infrastructure like highway building. The increase of inward FDI in Zhejiang province in 2003 was as in 2002. The number was 4,442 (32.0 percent more than the year before) and pledged amount was US$12.05 billion (77.5 percent more), actual amount was US$5.45 billion (72.4 percent more). It can be said that rapid FDI accumulation has caused progress in Zhejiang province.

5. Development Model Differentiation and Changes in Income Disparities 5.1. Changes in income disparities in Yangtze River Delta Table 5.24 shows the changes in per capita income disparities within the Yangtze River Delta during the reform and open door policy period from 1978–1990 and beyond.

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Table 5.24 Comparison of per capita income disparity in the Yangtze River Delta region (1990–2003)

1978 1985 1990

1990/ 78 1995

2000

2003

2003/ 90

Shanghai Urban area (yuan) Rural area (yuan) Urban/Rural

560 281 1.99

1075 2182 806 1665 1.33 1.31

3.90 5.93 —

7192 11718 14867 4246 5596 6654 1.69 2.09 2.23

6.81 4.00 —

Jiangsu Province Urban area (yuan) Rural area (yuan) Urban/Rural

288 830.8 1613 155 493 884 1.86 1.69 1.82

5.60 5.70 —

4647 2457 1.89

6800 3596 1.89

9262 4239 2.18

5.74 4.80 —

Zhejiang Province Urban area (yuan) Rural area (yuan) Urban/Rural

332 165 2.01

840 549 1.53

1932 1099 1.76

5.82 6.66 —

6224 2966 2.10

9279 4254 2.18

13180 5389 2.45

6.82 4.90 —

Shanghai/Jiangsu Urban area Rural area

1.94 1.81

1.29 1.63

1.35 1.88

— —

1.55 1.73

1.72 1.56

1.61 1.57

— —

Shanghai/Zhejiang Urban area Rural area

1.69 1.70

1.28 1.47

1.13 1.52

— —

1.16 1.43

1.26 1.32

1.13 1.23

— —

Zhejiang/Jiangsu Urban area Rural area

1.15 1.06

1.01 1.11

1.20 1.24

— —

1.34 1.21

1.36 1.18

1.42 1.27

— —

Source: Shanghai Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual. Note: Income is in nominal.

Throughout the 1980s we observe that, with regard to the difference between urban area and rural area in terms of per capita income (hereafter it is expressed as ratio of “urban/rural”), all the differences in Shanghai, Jiangsu province and Zhejiang province were reduced. The reasons for it are, however, not the same as for Shanghai municipality and the two provinces. Reduction of income disparity between urban and rural areas in Shanghai was from the relative stagnation in urban economic activity (because of the inefficiency of state-owned centered economy).

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On the contrary, in the two provinces of Jiangsu and Zhejiang, both urban and rural areas were growing. Particularly, the growth rate of rural areas in Zhejiang province was remarkable, which was higher than the rate of urban areas. It was contributed by the TVEs’ strong expansion. The reduction in the ratio of “Shanghai/Jiangsu” and “Shanghai/ Zhejiang” through the 1980s seemed to be its result. Also, the ratio of “Zhejiang/Jiangsu” has been increasing both in urban and rural areas. As far as per capita income disparity within the Yangtze River Delta after 1990 is concerned, all the ratios in Shanghai, Jiangsu and Zhejiang expanded. It can be expected that with rapid urbanization after 1990, income disparity between urban and rural areas in the Yangtze River Delta has increased. Regarding “Shanghai/Jiangsu,” since 2000 urban areas have reduced but rural areas remained the same. On the other hand, as for “Shanghai/Zhejiang,” since 2000 urban areas have remarkably reduced and rural area too decreased. On the income level of both Jiangsu and Zhejiang province, Zhejiang’s income had been constantly more than Jiangsu’s, and the “Zhejiang/Jiangsu” had been increasing in urban areas, and in rural areas it was decreasing after 1995, but after 2000 it has been increasing once again. Concerning the ratio of “2003/1990,” we recognize remarkable expansion in urban areas of Shanghai municipality and in urban areas of Zhejiang province. As mentioned earlier, economic growth in Shanghai after 1990 was mainly due to various advantageous measures based on the opening of Pudong area and based on serious activities of state-owned enterprises. We can mention therefore that, from viewpoints of income, the entire area of Yangtze River Delta is higher than all over China, and the economic performance of Zhejiang province has been obviously better than that of Jiangsu province. The reasons for this will be investigated later in the following section.

5.2. Shanghai model reconstruction: Reestablishment of goals of city function in Shanghai Under the coastal open strategy in the 1980s, South China, Jiangsu province and Zhejiang province in which non-state-sector rapidly grew caught-up with Shanghai, and Shanghai fell behind the market-oriented

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movement. Besides, Shanghai was way behind in the establishment of urban infrastructures like road and housing, building, electric power and water supply, and growth rate of manufacturing production, which in the 1980s was below the national average. Development strategy in the 1980s was called the “coastal open strategy,” under which with geographical advantage the “Guangdong Model” area and the “Jiangzhe Model” area had grown led by laborintensive industry and light industry, while traditional state-ownedcenter regions like Shanghai were behind them. Even the development pattern of coastal regions was different. Areas like industrial structure, industrial organization, degree towards market-oriented system, etc., which are different each other, also had taken significant effects. Empirical investigation to explain significant determinants of regional disparities indicates that manufacturing production by nonstate-owned sector was the main significant factor, as well as heavy industry production, local government financial inflow, fixed investment, and inward FDI. Regional disparity within the Yangtze River Delta in this period concerned can be understood to be between state-owned and non-state-owned, between light and heavy industries, difference of tertiary sector, and difference of fiscal policies.23 After 1990, advantages in Shanghai such as geographical advantages, historical background, historical accumulation, etc. have been paid attention. Shanghai and provinces in the Yangtze River Valley had been given a development strategy on the Pudong area development, which has been “to grow Shanghai to be a center of international economy, international trade and international finance which leads to a big jump of Yangtze River Delta and its Valley region.” In addition, a new goal, which was to be a “center of international distribution was set.” The above four centers have been established in Shanghai. Also, the following two could be pointed out. The first one is to reform state-owned enterprises. Reforming the state-owned enterprises in Shanghai has been the most serious task in Yangtze River Delta. As Table 5.17 shows, of the total manufacturing products in 2003 in Shanghai, the non-state-owned sector occupied 91.01 percent, which was more than 85.25 percent in 1949. The full 23

Chen and Toda (2001).

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scale market-oriented reform in Shanghai started in the 1990s. This means that it has broken away from the negative legacy of 30 years of a planned economy and has joined the globalized movement. The second is to become a center city of international business. Shanghai has been expected to be a center of China’s economy and finance. In Shanghai, therefore, we recognize many FDI cases, which serve as headquarters to unify management activities and information center, and R&D center, etc. Also, as the financial market in Shanghai has been rapidly opened and as Shanghai’s reputation as an international city has grown, mass media offices from foreign countries have also increased quickly. Shanghai municipality occupies an important position as a base of distribution from its geopolitical location.24 Since the end of the 1990s, its function to be a “center of international distribution” has been added as another goal for its development. In order to complete it, various infrastructure facilities such as harbor facilities (first construction of Yangshan Port), airport (Pudong’s second airport construction) have been progressing. The Yangshan Port which is the largest infrastructure building in Shanghai is now under way. Construction started in April 2002 and was planned to be completed in 2005 as the first harbor. The Yangshan Port is located around 30 kilometers northwest from Luchao harbor in Shanghai (Nanhui District) which is 45 kilometers from the international route. According to the complete schedule, it was planned to have 18 kilometers long wharf, 50 container berths and capacity to accept 15 million TEU annually. The distance from Shanghai to Nanjiang city (capital city of Jiangsu province, connected by Shanghai-Nanjing railway and Shanghai-Nanjing highway) is 292 kilometers, Hangzhou city (capital city of Zhejiang province, connected by Huyong railway and Huyong highway) is 195 kilometers and to Hefei city (capital city of Anhui province) is 452 kilometers. Shanghai municipality has two airports, which are the Hongqiao Airport (for domestic use) and Pudong 24 As Shanghai is located at the meeting place of the coastline and Yangtze River making a T character, it is said to be a “T-shape development strategy.”

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Airport (for international use) and two harbors at Huangpu River area and the Waigaoqiao harbor. Shanghai harbor received 11.28 million TEU container service which recorded as the third rank in the world.25 In Shanghai municipality, the authorities have tried to strengthen its position as a center of international distribution based on its geographical advantages and infrastructure. In the last few years, their effort has paid off with regard to the policy experiment of terminal linkage, whose purpose is to strengthen the functions of the trade center in Shanghai. In 2004, the total amount of exports and imports reached US$282.57 billion (40.4 percent more than the previous year, in Shanghai Customs Statistics), of which imports recorded US$121.3 billion (36.5 percent more) and exports US$161.27 billion (43.6 percent more). Linkages of Shanghai with cities in Yangtze River Delta have been reinforced through easier customs procedure and by the common use of electronic measures. As Table 5.25 shows, the basic indicators of Shanghai compared to the whole of China are, one percent population, 0.06 percent area, Table 5.25 Shares of Shanghai in 2004

Shanghai GDP Finances Retailing sales volume Container service volume Fixed investment volume Trade volume Cargo service volume Important technology

Whole China

Shanghai

Share of Shanghai (percent)

1,000 mil. yuan 1,000 mil. yuan 1,000 mil. yuan

136,515 26,300 53,950

7,450 3,952 2,455

5.5 13.7 4.6

1,000 mil. ton

40.0

3.79

9.5

1,000 mil. yuan

70,073

3,085

4.4

1,000 mil. US$ 1,000 mil. ton/ kilo 10,000 case

11,548 66,698

2,826 10,119

24.5 15.2

3.10

0.16

5.2

Source: Shanghai Statistical Yearbook, 2005. 25

It is from the homepage of Shanghai International Port (Group) Co., Ltd.

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13.7 percent budget income and 9.5 percent acceptance of container service, etc. What we described above seems to contribute to raise per capita income for Shanghai citizens (particularly in urban areas) due to restoration of Shanghai economy started by the opening of Pudong area.

5.3. Differentiation of Jiangsu model and Zhejiang model and changes of income disparities In the Yangtze River Delta of the 1980s, it was said to be the “Jiangzhe Model”; however, after 1990, the income level and growth rate of Zhejiang province have been higher than of Jiangsu province. After 1985, as a matter of fact, the per capita income of rural areas in Zhejiang province has remained in the top position of all provinces and self-governments for the last 19 years. What explains the situation? As was previously mentioned, the strong driving force of the private economy for a high speed economic growth in Zhejiang province has been the remarkable characteristics of this area, which has been a crucial factor which led to income disparity between it and Jiangsu province. Table 5.17 indicates the share of non-state-owned sectors in manufacturing products has been rapidly increasing both in Zhejiang and Jiangsu provinces. The non-state-owned sector is needless to say classified as foreign-owned enterprises, collective-owned enterprises (in China that means enterprises owned by towns and villages and not by counties) and private-owned enterprises. It predicts, therefore, in order to recognize the effects of the respective development model on income disparity; it is necessary to understand the differences of the TVEs between Zhejiang province and Jiangsu province. In Jiangsu province, there has existed distinctive regional disparity between the Southern area and the Northern area (the Northern area of Jiangsu province has been less developed), which suggests that the Jiangsu Model should be correctly understood as the “South Jiangsu Model.” The Zhejiang Model was known as the “Wenzhou Model” in the 1980s, whose essence was private oriented economy led by private activities. Both the Jiangsu Model and the Zhejiang Model

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have been in an advantageous position compared with state-owned economies and contributed for regional development in the 1980s. At the beginning of the 1990s, however, we can recognize slight differences between them arising from the following reasons. First, we understand the difference in nature of enterprises. The collective-owned enterprise in the “South Jiangsu Model” was one led by the local government (what is called an administrative directive), and the enterprise in the “Wenzhou Model” was private-owned. After the Fourteenth National People’s Congress in 1992, “market economy” has become more prominent for development in China. Under the “dual system,” which was a rather complicated one in the 1980s, the “South Jiangsu Model” was activated; however, under the wave towards a market-oriented system it has faced barriers on property rights (in which property rights have never been well-defined). In the “South Jiangsu Model” thus, the gap between the market-oriented way in production and distribution mechanism, and administrative directives has become more serious. Research on the founding of enterprises held in 2004 made clear that provisions for governmental permission in Jiangsu province were double than in Zhejiang province. Also, the financial situation for private enterprises has been serious, which shows that, although 34.4 percent of GDP in Jiangsu province was contributed by TVEs, bank loans for financing their TVEs occupied only nine percent. It was around half of private enterprises in Zhejiang province. Enterprises in Zhejiang province which are basically privateowned have been better adapted towards a more evolutionary movement of market economy, which has caused greater differences between performance of TVEs in Jiangsu and Zhejiang provinces. As of 1993, profit and tax payment by TVEs were about the same in both Jiangsu and Zhejiang province. However in 1996, they were 24.5 percent more in Zhejiang province than in Jiangsu province. Following this, the difference has become slightly less, but fundamentally the situation has remained unchanged. In 1998, TVEs in South Jiangsu tried to reform the system led by the government, which was, however, difficult. In 2000, they were forced to radically reform the institution for enterprises. They can say that the “South Jiangsu Model” has faced serious transition.

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Second, the differences in traditional culture and climate can be pointed out. Zhejiang province and Jiangsu province are located north and south of Shanghai which means that they have similar geographical advantages. Although the area is about the same, 100 thousand square kilometers, Jiangsu province has 69 percent plains and 17 percent water areas and with regard to Zhejiang province it is “70 percent mountains, 20 percent water areas and 10 percent rice fields.” Zhejiang province has less advantages than Jiangsu province for agriculture. Zhejiang province has small arable land compared with its population density. Its per capita arable land therefore equals to only 0.86 furrows, which is 0.6 furrows less than in Jiangsu province (one furrow equals to 6.667 ares). In Wenzhou its arable land is much smaller, with 0.41 furrows. With such agricultural condition, people in Zhejiang province traditionally think leaving homes in search of work is indispensable to their living. Their well-known activities were described as “no Ningbo business persons, no market, and no Shaoxing secretary for the official,26 no government office.” During the South Song dynasty period, Confucianism which insisted “attaching greater importance to justice and making light of gain” filtered into the hearts of people in Jiangsu area, Zhejiang area (Wenzhou) was the birthplace of “Yongjia School” which advocated of “reaching justice through gain.” As described above, it can be explained that people in Zhejiang region traditionally have entrepreneurship, whose resources are quick to understand profitable opportunities taking into consideration risk factors. This has become the traditional culture and climate in Zhejiang area.27 26

Shaoxing secretary indicates a secretary who has leading roles for bureaucrats in the local government. Generally, there have been three types of Shaoxing secretary; for financial administration, for criminal administration and for documents management. Shaoxing city has been traditionally well-known as superior to the others in culture and education, and has produced many scholars who passed the impassable state examination for high ranking government officials, some of whom were chosen as either a founder of private school or a secretary for local government officials. Because being the latter made leaving home necessary, the name of Shaoxing secretary has been widely known. 27 As described earlier, it is not easy to test the significance of cultural and climate factors. From viewpoints of contemporary method of social science, confirming the significance by either experiment or questionnaire research seem to be the way to do it. It is necessary with such approaches to recognize the path of economy and society concerned.

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As a matter of fact, since the 1980s, while people in Jiangsu have never left their lands and native places whose nature was more agricultural, people in Zhejiang have become more business-minded. This explains the fact that in 2003, annual income of people from Zhejiang province who took part in business, etc., outside Zhejiang altogether reached 620 billion yuan. Has the private economy developed in Zhenjiang province contributed to the increase of income level? The “Jiangzhe Model” in the 1980s was based on TVEs, which has been what is called the farming industry. TVEs have taken root in rural areas. In this section, we investigate changes of differences between the two provinces with transition of development models depending on indicators of peasants’ per capita income in both provinces (see Figure 5.2). First, as shown in Figure 5.2, the period of 1981–1988 was eight years with slightly increasing difference. Annual average growth rate of peasants’ per capita income in that period in Zhejiang province and Jiangsu province was 19.3 percent and 17.6 percent respectively.

150 140 130 120 110 100

3

2

1

99 20 00

97 98

96

95

93 94

92

91

89 90

88

87

85 86

84

83

81 82

19 80

90

Figure 5.2 Changes in difference in per capita income of farming villages in Zhejiang province and Jiangsu province: Index (Jiangsu = 100) Source: Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual.

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The index of income in Zhejiang province (when income in Jiangsu province was fixed to be 100) was increased to 113.2 from 100.6. Also, moving velocity of redundant labor force in rural areas of both provinces in that period was quite similar. Second, the period of 1989–1993 was five years with extremely increasing difference. During 1989–1991, the central government began to view the macroeconomic policy seriously. This seriously affected the government led TVEs. Small-sized TVEs which were classified as environmental pollution types and resource consumption types experienced bankruptcy. In addition, in 1991, the Jiangsu province experienced severe floods and peasants’ income declined due to this. In 1992 and 1993 because of the “Southern Journey” by Deng Xiaoping, both provinces’ economy developed particularly in the secondary and tertiary sectors. Jiangsu province was, however, still behind Zhejiang. During the five years concerned here, labor force in farming villages in Zhejiang province decreased by 4.5 percent, meanwhile in Jiangsu province it was 0.9 percent less. With regard to annual average growth rate of peasant’s per capita income, in Jiangsu province it was 12.3 percent, and in Zhejiang province 18 percent. From 1994 to 1997 there was a drastic increase in prices of agricultural products. In 1994, agricultural products purchasing prices index reached 139.9 which was 22.7 more than manufacturing retailing prices index. Both in 1995 and 1996, prices of agricultural products increased, which slightly decreased in 1997 but still kept being high. It means that, the share of agricultural income to the total in Jiangsu province was 15–20 percent more than in Zhejiang province, high level prices of agricultural products were more beneficial for Jiangsu province than for Zhejiang province. At the same time, because the development of non-agricultural industry at farming villages in Zhejiang province was favorable, the increase in peasant’s per capita income in both provinces was rather similar (in Zhejiang province 1,939 yuan more and Jiangsu 2,004 yuan more). Fourth, the period of 1998–2003 was six years with increasing differences once again. Price index of agricultural products and of

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manufacturing, products kept on decreasing in this period. During this six years period, in Zhejiang province the redundant labor force in farming villages moved satisfactorily coming from development of the secondary and tertiary sectors which led to 13.4 percent decrease of labor force in farming villages (in Jiangsu province it was 9.3 percent decrease). The delayed movement of redundant labor force in Jiangsu province seemed to be significant with regard to income disparity between the two provinces. Besides, the price decrease of agricultural products was more than in manufacturing products in this period and it had more serious effects on peasant income in Jiangsu province. Increase of peasant’s income during this period in Jiangsu province and Zhejiang province was 29.6 percent and 47.4 percent (annual average 4.4 percent and 6.7 percent) respectively. The index of income in Zhejiang province (Jiangsu province fixed to be 100) was increased to 128.1 from 112.7. What are the more specific situations of the changes in income disparity? The structure of peasant’s income in the two provinces is shown in Table 5.26, which can be explained as follows. First, as for wage income, in Zhejiang province it was constantly more than it in Jiangsu province, and the disparity of income level seemed to be increasing. Also, the ratio of disparity was recorded as 35 percent in 1995, and around 20 percent ratio was maintained till 2003. This seemed to arise from the actual situation in the period concerned, which can be said that in Zhejiang province there were more enterprise founders and in Jiangsu province more workers leaving their homes. In general, the income level of enterprise founders is more than that of workers. Private enterprises in Zhejiang province have better established ownership, etc., and have more efficient management than collective-owned enterprises in Jiangsu province, which indicate more income for employees. Second, with regard to the net income of household economy, in Zhejiang province it was also constantly more than Jiangsu province. While household economy in Zhejiang province was mainly composed of non-farming industries, in Jiangsu province it was farming. The ratio of farming to net income of household economy in

Zhe vs. Jia

Jia

Jia

Zhe

1980 1985 1990 1995 2000 2001 2002 2003

218 493 884 2457 3785 3996 4239 3785

219 549 1045 2966 4582 4940 5431 4582

118 135 301 822 1663 1820 1994 2189

125 163 354 1110 2001 2226 2437 2613

7 28 53 288 338 406 443 424

Jia

5.9 20.7 17.6 35.0 20.3 22.3 22.2 19.4

58 319 631 1544 1771 1783 1796 1794

Zhe

Zhe– Jia

Ratio of Excess (percent)

Jia

63 361 690 1696 1918 2000 2075 2336

5 42 59 152 147 217 279 542

8.6 13.2 9.4 9.8 8.3 12.2 15.5 30.2

42 39 27 91 161 182 206 256

Source: Zhejiang Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual. Note: Zhe indicates Zhejiang Province, and Jia shows Jiangsu Province.

Zhe

Zhe– Jia

Ratio of Excess (percent)

31 25 55 160 335 357 427 482

−11 −14 28 69 174 175 221 226

−26.2 −35.9 103.7 75.8 108.1 96.2 107.3 88.3

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Ratio of Excess (percent)

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Per Capita Income (yuan)

Asset Income and Transfer Income (yuan)

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Net Income of Family Management (yuan)

Wage Earnings (yuan)

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Table 5.26 Disparity structure in peasant’s per capita income in Zhejiang province and Jiangsu province

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Zhejiang province in 2003 was 44 percent, and in Jiangsu province was 65.4 percent. Income from farming of Zhejiang’s peasant’s income was 144 yuan less than Jiangsu’s peasant; however, as for nonfarming household income, for a peasant in Zhejiang province it reached 1,307 yuan which was 686 yuan more than in Jiangsu province. It better explains the financial capability of Zhejiang’s peasants to invest their money into manufacturing and commercial sector. Third, remarkable disparity was recognized in asset income and transfer of income between the two provinces (except in 1980 and 1985). After 1990 the ratio of disparity between peasants in Zhejiang and Jiangsu has reached around 100 percent. As mentioned above, various indicators show that peasant’s income in Zhejiang province was more than in Jiangsu province, whose crucial factor is we think, arising from successful grass roots economy. It would be necessary for Jiangsu province to reform the institution for TVEs and to promote culture and climate for enterprise founders. Needless to say, it must be on a longer-term and a much more fundamental task to overcome.

5.4. Foreign enterprises, employment and income disparities Jiangsu province has been successful in attracting FDI. What effects has the success had on employment and income for Jiangsu province? Needless to say, it needs much investigation to analyze the exact effects of FDI; however, in this section we will examine it in a simple way. Jiangsu province has many redundant workers in rural areas, who should be adjusted through industrialization and urbanization. However, the breakdown structure in labor and in value added in GDP explains the difference between the two structures. It implies that worker absorption by the manufacturing sector, especially those who moved from rural areas, are negligible and the above difference has become more serious (see Table 5.27). As foreign investment has concentrated on the manufacturing sector (more than 80 percent in Yangtze River Delta and in Jiangsu province 80.5 percent in 2003),

Difference (B−A)

Secondary

Manufacturing

Tertiary

Primary

Secondary

Tertiary

Primary

Secondary

Tertiary

1978 1980 1985 1990 1995 1996 2000 2002 2003

27.6 29.5 30 25.1 16.4 16.1 12 10.5 8.9

52.6 52.3 52.1 48.9 52.7 51.2 51.7 52.2 54.5

47 47.3 47.2 44.8 47.9 45.9 44.8 45.4 47.8

19.8 18.2 17.9 26 30.9 32.7 36.3 37.3 36.6

69.7 70.4 53.2 56.6 46.9 45.9 42.8 39.6 39

19.6 19.4 32.7 28.7 32.1 31.9 30.2 30.3 30.6

10.7 10.2 14.1 14.7 21 22.2 27 30.1 30.4

42.1 40.9 23.2 31.5 30.5 29.8 30.8 29.1 30.1

−33 −32.9 −19.4 −20.2 −20.6 −19.3 −21.5 −21.9 −23.9

−9.1 −8 −3.8 −11.3 −9.9 −10.5 −9.3 −7.2 −6.2

Source: Jiangsu Statistical Yearbook, annual.

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GDP Structure (A)

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Table 5.27 GDP value-added structure and employee structure (Jiangsu province) (percent)

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it is not easy to understand that huge amount of FDI which significantly contributed to job opportunities. Since the middle of the 1990s, institutional reform of state-owned enterprises towards modern enterprises and towards more efficient management has required restructuring of workers, which has produced many “temporary layoff” (actually unemployed) workers. It has made clear the existence of “disguised unemployment” which has been a serious problem for state-owned enterprises. In addition to the movement problem of redundant workers or “temporary layoff” workers getting a new job has brought about serious social unrest. Compared with 1996, at the end of 2001 the number of employees of state-owned enterprises and collective-owned enterprises decreased to 51.0 percent less and 69.0 percent less. The share of all employees decreased to 16.9 percent (14.9 percent less) and 18.9 percent (37.4 percent less) respectively. On the contrary, the number of employees of private-owned enterprises expanded to 24 times more which corresponds to an increase of 26.1 percent (25.2 percent more) of all employees. The number of employees of foreign-owned enterprises became 43.8 percent more and its share being 10.7 percent from 6.9 percent (3.8 percent more). We understand that private-owned enterprises have been the most employment-absorbed sector, and foreign-owned enterprises have been less when compared with their investment amounts. Reasons for this can be explained as follows. While many private-owned enterprises are labor intensive, most foreign-owned enterprises are shifting towards capital intensive, which was, we think, due to each province’s encouraging items and the central government’s investment encouragement policy since 1992 towards a more advanced industrial structure. Table 5.28 indicates that sectors with a high export amount ratio of foreign-owned enterprises are electronic and telecommunications equipment (27.5 percent), spinning (13.7 percent), and sectors which have foreign-owned enterprises’ high ratio in manufacturing value added are electronic and telecommunications equipment (79.4 percent), leather and fur goods (43.7 percent), clothing and textile (36.2 percent) and nonmetallic mineral products (32.2 percent). It is clearly recognized that

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Table 5.28 The ratio of foreign enterprises in the export industries in Jiangsu province (2002; percent)

Rank

Sector

1

Electrical and telecommunication equipment Spinning Clothing and textile Chemical materials and products Electric machinery and materials Transportation equipment General machine Metal products Non-metallic mineral products Leather and fur products

2 3 4 5 6 7 8 9 10

Ratio of Foreign-owned Enterprise of Export Amount

Ratio of Foreign-owned Enterprise of Manufacturing Value Added Amount

27.5

79.4

13.7 9.6 6.0

12.0 36.2 21.6

5.2

30.2

4.8

21.9

4.5 4.1 3.0

19.6 25.7 32.2

2.9

43.7

Source: Jiangsu Statistical Yearbook (2003).

inward FDI into electronic and telecommunications equipment has been making progress. High-tech industry in Jiangsu province has been attractive for foreign-owned enterprises. Foreign origined enterprises in the high-tech sector has already become the main force of the high-tech industry in Jiangsu province, which occupied 50.8 percent of the whole province’s high-tech enterprises, and 81.6 percent of export amount of whole province’s high-tech enterprises in 2001. As was described above, successful invitation of foreign-owned enterprises has greatly contributed towards advancement of industrial structure. However, it has never contributed enough for creating job

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opportunities. It should be necessary to have more appropriate policy measures for regional necessity. On the contrary, in Zhejiang province, a labor intensive industry has been developed with activities of private-owned enterprises and have provided job opportunity. Such activities by private-owned enterprises have progressed to be more competitive with foreignowned and state-owned enterprises. We therefore expect the industrial structure to be more advanced through such a development model based on private-owned enterprises. With the wording of grass roots market economy in Zhejiang province and grafting market economy in Shanghai, Jiangsu province is just between them, both development in inward FDI and in private-owned enterprises will be progressing from viewpoints of present policy measures.

6. Systemic Transition in China: What Has Made China More Developed? As described previously, the collapse of Soviet-type planned economy was mainly due to extremely delayed technological progress which prevented the economies from extensive growth and rigidity of planned economy shown by inconvertibility. According to Winiecki (1988), it can be said as overgrowth of the industrial sector. However, with what is called a centrally-planned system, China has never collapsed. What explains China’s successful economic performance? Needless to say, the Deng Xiaoping era was completely different from the Mao Zedong days, even under the same system called socialism. Here in this chapter we concentrate our attention on the Deng Xiaoping era after the reform and open door policy.

6.1. Gradual reform process in China: Wisdom of creative destruction The Chinese transition started at the end of 1978, with the reform and open door policy led by Deng Xiaoping, which is called a gradual way of transition. Taking into consideration another transition way, the radical approach, the following two issues should be analyzed here,

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which are (1) why China has needed a gradual way of transition, and (2) why China has been able to carry out its gradual way. First, we should have an overview of the necessity and characteristics of China’s gradual way of transition. As far as we can observe, China’s gradual approach has followed the original course which shows us that gradual reform should be expanded from rural areas (household contract responsibility system) to urban areas (state-owned enterprises), and from coastal regions to inland regions. Also in urban areas, reform on enterprises and industry has been first implemented for much freer activities of foreign-owned and private-owned enterprises, and then based on their successful experience, the reform has gradually spread over to state-owned enterprises. A retrospective of policy process on the reform and open door and regional development in the 1980s could be summarized as follows. First, in 1980, four Special Economic Zones (Shenzhen, Zhuhai, Xiamen and Shantou) were established, and then in 1984 Economic Development Zones, which consisted of 14 coastal open cities (then became 15 cities including Weihai) were founded. In 1985, 58 cities were appointed as general experimental cities for economic system reform. In 1985, seven ordinance-designated cities were appointed which were given budgetary authority as the same as the then three direct controlled municipalities under central government. Also in 1985, coastal open regions (meaning the following five which are Changjiang, Zhujiang, Minjiang Delta, Shandong, Liaodong peninsula) were appointed, whose purpose was to build the open area unified agriculture, manufacturing and trade (implying that its purpose was to distribute more value added products of agricultural and of manufacturing domestic, as well as abroad, through an advanced distribution system under the plan unifying agriculture, manufacturing and trade). In 1988, Hainan province was founded and appointed as the Special Economic Zone. In short, the reform and open door policy in the 1980s was to decentralize from center to each district’s main measures. To be appointed as an open city and an open area, etc., has been able to establish the development zone of China’s national level and to have authority of approving investments by foreign enterprises which lead regional economy to be more active.

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Under the new coastal open strategy, which began by appointing open areas like the Special Economic Zone, by progressing TVEs and by implementing a household contract responsibility system, in rural areas in the 1980s, growing industries in growing regions have been labor intensive. They indicate the “Guangdong Model” led by foreign-owned enterprises and the “Jiangzhe Model” led by TVEs (whose region covered the Southern part of Jiangsu province and the Northern part of Zhejiang province). In the 1990s, all the front strategies have been implemented. Appointing open regions and coastal regions have been expanded towards inland regions (in the 1980s). The policy processes are summarized as follows. First, in 1990 the Shanghai Pudong Opening Declaration was implemented. Second, in 1992 the Southern Journey of Deng Xiaoping started, Shanghai Pudong area development formerly began and also in 1992 the opening policy of Seacoastal region was implemented, Changjiang-coastal region and Borderland region strategy was submitted which meant, coastal regions, another 36 cities including five cities in Changjiang-coastal region, 13 cities in Borderland region (to develop border trade), and 18 inland cities and provinces have been appointed as strategic regions for development. Third, they started the “Go-West” policy in 1999, which indicated a large-scale development project for Western regions (on the Western region, see Figure 5.1) with big amounts of financial expenditure for industrial infrastructure building, agricultural infrastructure building, education expenditure, like “Transport Water from South to North” project (meaning the infrastructure building to transport water from Southern region to Northern region). Also, lots of important national projects were related with Western Development, projects such as construction work of temporary drainage canal of Changjiang’s Sanxia dam, railway construction between Qinghai and Tibet, “Transport Electrical Power from Western to Eastern Region” project, “Transport Natural Gas from Western Region to Eastern Coastal Region” project and the Eastern route of “Transport Water from South to North” project. In order to implement such projects, issuing long-term construction treasury bond amounted to 660 billion yuan for five years from 1997. Such finance, altogether including

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bank loans and others induced investments to reach 3,280 billion yuan, with which it was estimated to generate 1.5–2.0 percent annual GDP growth rate and create 7.5 million jobs. Fourth, industrial region promotion strategy in the Northeast region in 2001 (on the Northeast region, see Figure 5.1). The Northeast region indicates three provinces of Heilongjiang, Jilin and Liaoning which were similar to Shanghai at the beginning of the 1990s. This means being known as a base for state-owned heavy industries and as a less reformed area towards market-oriented system. What has been necessary is restructuring of ill-managed state-owned enterprises and of reforming workers discipline to work diligently and with self-reliance. These reforming strategies have been, needless to say, initiated by the central government. Fifth, the Central region promotion strategy was formally approved in 2004 (on the Central region, see Figure 5.1). The Central region has been recognized to be “neither East nor West,” which points out that the Central region has been left behind in development. With strong request from regional governments, the central government has approved the promotion policy for “center to come to the front” strategy. However, the details are still uncertain. In the Central region, needless to say, they have such important transformation arteries as the Jingjiu Railroad (which connects Beijing and Jiulong in Hong Kong). However, the Western part of Jingjiu Railroad is covered by the construction of the Third Front region,28 where many former state-owned enterprises have been located and they have the same problems as the Northeast region. Also, the Eastern part of 28

In the period of the Third Five Year Plan (1966–1970) and the Fourth Five Year Plan (1971–1975), based on the strategic thinking by Mao Zedong which was in preparation for a possible World War (against the USA and the then USSR), they placed great importance of industry building on the Third Front of the inland regions, which was called the Third Front Construction. Third Front means the huge inland region which indicates South of the Great Wall, North of Shaoguan, West of Jingguang Railroad, and East of Gansu and Wushao Peak. As a result of Third Front Construction, in the Third Front particularly in the Southwest region, an industrial base for heavy industry and military industry including steel, machine, energy, electronic, aircraft, space rocket, etc., was established. Needless to say, as those industrial productions have been taken by state-owned enterprises, since the 1980s traditional region of the Third Front has suffered from the delayed position of market oriented transition.

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Jingjiu Railroad was easily appointed for construction of the minor Third Front region29 and they have still been seriously suffering from traditional administrative regulation. Even not so of what is called “duke economy” (which means that, because of complicated administrative barriers, the market was in a situation of breaking into pieces) in the 1980s, protection measures have been employed for labor forces and raw materials not to distribute flexibly. We easily recognize the Western difficulty of integrating into economies in the Eastern region. Systemic transition has been therefore the necessity for regional economies in China to work reasonably. It means that the way to develop inland economy in China might neither be flat nor easy. It can thus be mentioned that the meaning of employing a gradual way of reform is to implement “the easier the first” in order for people to accept the benefits of reform, and to avoid spending energy against ideological debates. The characteristics of China’s transition could be said as “creative destruction,” under which, while roles of state-owned sectors gradually diminish, activities by foreign-owned and private-owned sectors become easier to work. We think these activities may support restoration of state-owned enterprises. As a result, as investigated above with the Yangtze River Delta region, state-owned sectors have become smaller in size and less inefficient. Actually, the State Asset Management Committee in China had announced its basic plan, which limits stateowned enterprises from playing the role in important fields of national economy, with the maintenance of their monopolistic position of around 200 large scale state-owned enterprises (of central government). Needless to say, as mentioned previously, in order to strengthen competitiveness the Chinese government has a clear tendency of allowing state-owned enterprises to be multinationalized, through mutual penetration among domestic and foreign capitals. 29

Different from the above-mentioned major Third Front (of footnote 28), the building plan of minor Third Front indicates the region meeting the condition of “mountains, diffused, caves.” For example, the minor Third Front constructions in which Shanghai was involved indicated as it were the minor Third Front in East China (Jiangxi province) and the base behind Shanghai (Anhui province and Zhejiang province).

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6.2. On the transition costs: Disparities Table 5.29 displays the main economic indicators in China in 2000–2003. We could generally recognize that China’s economy has recorded a good performance, which means high GDP growth rate, low rate of inflation, moderate rate of unemployment, net large amount of foreign exchange reserves. With regard to the budget deficit, the figures are a little less than three percent. As often indicated and shown in this chapter previously, a serious problem accompanying transition and development in China has been income disparity. In the 1980s, crucial reasons behind the regional income disparities were (1) systemic difference, which pointed out the gap of economic growth rates between more centrally-planned regions with traditionally state-owned sectors and more market-oriented regions with non-state-owned sectors, and (2) policy differences, which state that the regional imbalance arise from coastal open strategy. Table 5.29 Economic indicators of China’s economic performance 2000

2001

2002

2003

2004

2005

Real GDP growth 8.0 7.5 8.3 10.0 10.1 9.9 rate (percent) Inflation (CPI, 0.4 0.7 –0.8 1.2 3.9 1.8 percent) Unemployment 3.1 3.6 4.0 4.3 4.2 4.2 rate (percent) Balance of payment 20,519 17,405 35,421 45,875 68,659 160,818 (US$ million) Foreign deficit 145,730 170,110 171,360 193,634 228,600 281,050 (US$ million) Foreign exchange 165,574 212,165 286,407 403,251 614,500 821,514 reserves (US$ million) Budget deficit –2.79 –2.58 –3.0 –2.5 –1.46 –1.64 (percentage of GDP) Source: Chinese Statistical Yearbook, annual.

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In the 1990s, under the all front policy, the policy differences were reduced step by step (at the end of 1992, development zone boom occurred all over China and competition for advantageous policy went too far), and since January 1994 a series of institutional reforms on tax and budget were put into force. In particular, the then Prime Minister Zhu Rongji employed the three reforms of state-owned enterprises, financial system and administrative system, under which environments for reforming state-owned enterprises were steadily prepared. It implied the release period for regions such as Shanghai, from being restricted to traditionally state-owned enterprises. The determinants of disparities in China in the 1990s have been towards more generalized ones as indicated in development economics, from systemic differences (due to the difference between state-owned sectors and non-stateowned sectors) and policy differences (arising from imbalance in the reform and open door policy) although they have still persisted. The actual situation on income disparities in China is as follows. With regard to the Gini coefficient, the World Bank, for example, announced Gini coefficient in China as 0.376 in 1992, 0.403 in 1998 and 0.447 in 2001. More precisely, there have been three kinds of Gini coefficient in China, which are the Gini coefficient of the whole of China, the Gini coefficient within urban areas and the Gini coefficient within rural areas. Figures on the Gini coefficient announced by various research institutes and research groups were rather different. For example, a March 2004 announcement by the income distribution research team (of Economic Research Institute in Chinese Social Science) showed 0.454 of all over China, 0.319 within urban areas and 0.366 within rural areas, in 2002. Also, statistics by the National Statistical Office indicated 0.397 of all over China, 0.3 within urban areas and 0.3361 within rural areas in 1999 (see Table 5.30). As far as Table 5.30 is concerned, we could explain it as follows. After the reform and open door policy of 1978, per capita income within both urban areas and rural areas rapidly increased and income disparities (of all over China, within urban areas and within rural areas) also remarkably expanded. The Gini coefficient of the whole of China went up to 0.397 in 1999 from 0.341 in 1988. Such rise of Gini coefficient could be explained as arising compoundly from regional disparities,

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Urban

Rural

Whole China

1978 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

0.16 0.16 0.15 0.15 0.15 0.16 0.19 0.19 0.2 0.23 0.23 0.23 0.24 0.25 0.27 0.3 0.28 0.28 0.29 0.3 0.3 0.32

0.2124 0.2407 0.2406 0.2317 0.2461 0.2439 0.2267 0.3042 0.2889 0.3053 0.3185 0.3099 0.3072 0.3134 0.3292 0.321 0.3415 0.3229 0.3285 0.3369 0.3361 0.3536

— — — — — — — — — 0.341 — 0.343 — — — — 0.389 0.375 0.379 0.386 0.397 —

Source: Chinese Statistical Office.

disparities among sectors, disparities among several types of enterprises, disparities between urban and rural area, etc. Decomposition of the Gini coefficient into urban areas and rural areas shows that the Gini coefficient within urban areas went up 0.32 in 2000 from 0.16 in 1978. During this period, we recognize discontinuous increases in some years. The 1985 increase was mainly due to institutional reform in wages and prices, and the increments of 1988, 1993 and 1994 were mainly from aggravation of inflation. The 2000 increase could be because of the wage adjustment policy. With regard to Gini coefficient within rural areas, it increased from 0.21 in 1978 to 0.35 in 2000, which showed remarkably

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expanded disparity. Disparities within China’s rural areas have been produced by conditions such as the initial one (due to difference in industrial structure, difference in accumulation of production factors), geographical one (whether or not next to a big city, whether or not in the Eastern region), etc. Rich rural areas are those with lots of opportunities to gain non-farming income, which means farming industry, trade, transportation, construction, service, etc., and also job opportunities to work at the neighboring urban area. Non-farming income seems to be the most important factor causing income disparity among rural areas. (As described earlier, in Section 5.3, it has become clear that shares of wage income and net income of household economy to the total income were dominant and the disparity of non-farming household income was closely connected with income disparity between peasants in the two provinces.) Table 5.31 indicates the income disparity between urban and rural area as ratios of income. Engel’s coefficient has been decreasing both in urban and rural areas. With regard to the statistics showing how many times more is the per capita income in urban areas than in rural areas (except the years of 1978–1985) the times concerned generally increased. The times of income in urban area than in rural area remarkably reduced in 1978–1985, after that the times of income was moving with fluctuation, and since 1996 it has indicated increasing tendency leading to three times more in 2002. Per capita GDP disparity among the three regions, Eastern, Central and Western regions, points out that (using a per capita GDP in the Eastern region as being 100) in 1980 in Central and Western regions equals to 65 and 51 respectively, in 1990 it was 60 and 52 respectively which means (increase in the Eastern region) slightly moving down in Central region. However after that, in 2000 it became 53 and 41, in 2002 it was 49 and 39, and in 2003 it showed 44 and 34, with which we recognize extreme increase in Eastern income and remarkable expansion compared with both Central and Western (see Table 5.32) incomes. It is necessary that we think of the disparity in China to investigate from various viewpoints such as disparity among provinces, disparity among cities, disparity among rural areas, etc. (As stated earlier, in Section 5.3, we distinguish the disparity changes which occurred

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Transition, Regional Development and Globalization Table 5.31 Per capita income of rural and urban areas in China Per Capita Income in Rural Area

Per Capita Income in Urban Area

Year

Yuan

Index 1978 = 100

Yuan

1978 1980 1985 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

133.6 191.3 397.6 601.5 686.3 708.6 784 921.6 1221 1577.7 1926.1 2090.1 2162 2210.3 2253.4 2366.4 2475.6 2622.2

100 139 268.9 305.7 311.2 317.4 336.2 346.9 364.4 383.7 418.2 437.4 456.2 473.5 483.5 503.8 528 550.7

343.4 477.6 739.1 1373.9 1510.2 1700.6 2026.6 2577.4 3496.2 4283 4838.9 5160.3 5425.1 5854.02 6280 6859.6 7702.8 8472.2

Engel’s Coefficient

Index Ratio 1978 = 100 Urban/Rural Rural Urban 100 127 160.4 182.5 198.1 212.4 232.9 255.1 276.8 290.3 301.6 311.9 329.9 360.6 383.7 416.3 472.1 514.6

2.57 2.50 1.86 2.28 2.20 2.40 2.58 2.80 2.86 2.71 2.51 2.47 2.51 2.65 2.79 2.90 3.11 3.23

67.7 61.8 57.8 54.8 58.8 57.6 57.6 58.1 58.9 58.6 56.3 55.1 53.4 52.6 49.1 47.7 46.2 45.6

57.50 56.90 53.31 54.50 54.24 53.80 53.04 50.32 50.04 50.09 48.76 46.60 44.66 42.07 39.44 38.20 37.68 37.10

Source: Chinese Statistical Yearbook, 2004 and authors’ calculation.

among provinces in Yangtze River Delta by taking urban and rural areas apart, and analyze reasons for it.)

6.3. Some investigations As often mentioned, it is rather hard to recognize transition in China correctly. However, we think it is possible to indicate several crucial points relevant to the issue. China’s way of gradual reform has also been classified as growth-oriented (pointed out by, for example, Pomfret (1997), and also mentioned by Morita and Bozyk (1997), and Morita (2004)).

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Table 5.32 Per capita GDP and disparity among three regions in China 1980

1990

2000

2002

2003

Per capita GDP (yuan) East Central West

598 391 306

2240 1338 1156

11334 5982 4687

14363 7047 5536

18931.4 8293.3 6493.3

Ratio Central/East West/East

0.65 0.51

0.60 0.52

0.53 0.41

0.49 0.39

0.44 0.34

Source: Chinese Statistical Yearbook, annual, and authors’ calculation. Note: Per capita GDP is in nominal.

However, different from the gradual way of Hungary, China has never been criticized as is called, hidden shock therapy. Undoubtedly as indicated by, for example, Sachs and Woo (1994) and Balcerowicz (1995), China’s transition was dependent on its characteristic conditions and initial conditions. Actually before reformed China, it had a loose social structure and was covered by vast agriculture. In addition to the above, it has a huge area and remarkable varieties. Under such circumstances, going ahead with liberalization and democratization in a stroke would neither be possible nor wise policy.30 What we should acknowledge is the importance of the existence of Deng Xiaoping, who was a prominent strategist who knew everything about the situation at home as well as abroad, and was called the chief designer for the reform and open door policy in China. (Unfortunately, analysis such as political economy in China is beyond this chapter, which will be attempted at a later opportunity). Various factors are necessary in order to accept such a strategy and design and lead to growth. In this chapter, we have attempted to extract a key factor by observing interesting development models in the Yangtze River Delta region, which are Zhejiang province led by private-owned enterprises and Jiangsu province led by inward FDI. 30 See Ohno (1997) on his critical comments to Sachs and Woo (1994). Also, see Watanabe (1994) and Watanabe and Kojima (1994).

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In particular, as shown previously with the questionnaire stating that four cities of Zhejiang province which are Hangzhou, Ningbo, Wenzhou and Shaoxing are ranked within the top 10 cities, traditionally accumulated human resources in Zhejiang province. The social and cultural background of Zhejiang province has never been accidental, but has been acceptable of marketoriented system based on traditional culture and climate in Zhejiang province. Such accumulated human resources have made the grass roots market economy possible. We think that those interesting trends we could observe in Zhejiang province can provide us important suggestions for transition and development through making the path clear. Needless to say, inward FDI which highly contributed for the growth of Jiangsu province (and of Guangdong province) has played a remarkable role for the transition. Particularly, the existence of China’s business network for foreign investment has been indispensable for FDI inflows in China as more than 50 percent share of Hong Kong, Macao and Taiwan displays. To successfully accept inward FDI requires, however, some circumstances whose base has been resources as described previously. It is the reason why we think the culture and climate in Zhejiang province has been a crucial key factor for successful transition and development. As indicated by the Gini coefficients, income disparity in China has been beyond comparison with Central European transition economies. It suggests to us that as well Pomfret’s analysis mentioning China as “growth-oriented” (1997). China has to have more “system-change oriented” reform (as described by Pomfret to be the Central European way of transition). China as a matter of fact has employed more system-change oriented measures such as promoting labor mobility through reforming the household register as well as growth-oriented industrial policies such as Go West strategy in 1999, Industrial Region Promotion Strategy in the Northwest region in 2001 and the Central Region Promotion Strategy in 2003. It is therefore necessary to investigate actual changes of disparities in China and to exactly recognize the way of China’s transition, because those

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are necessary steps to construct better theory of transition and development.

7. Concluding Remarks The purpose of this chapter is to examine reasons for successful gradual transition in China, through observing the Yangtze River Delta region, through the present situation of inward FDI, through the impact of development model differentiation, and through comparative analysis with Central Europe (particularly Poland). As investigated above, there have been huge differences between China and Poland as well as area and population. Regarding their points, on the one hand, it has been the “Zhejiang Model” in which they have had the advantageous climate for doing business. Since the founding of a nation after the Second World War and under the socialist system, such advantageous climate has never gone extinct. We think that should be a key factor for the success of the Zhejiang Model. (According to the way of expression in Evolutionary economics, it is none other than “path dependence”31). The current situation shows us that the Zhejiang Model has been more developed with inflow of FDI. Another big difference from Poland has been the existence of China’s business network whose ratio of the total FDI inflow in the whole of China has remained around 50 percent. The existence of Chinese business network, meaning Hong Kong, Macao, and Taiwan (including The British Virgin Islands), should be correctly recognized for their contribution to China’s successful transition.32 As Pomfret (1997) correctly indicates, “China’s economic reforms were intended to produce economic growth, not system change” (p. 437) and Central European countries have “taken serious steps towards becoming market economies” (p. 439). Related to such ways of transition, China has suffered from income disparity and Poland huge unemployment rates. Recent few years tendency predicts 31

On the approach to do it, see, for example, Aoki (2001). We have no investigations here, but it is necessary to consider whether or not the two are independent.

32

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therefore that, China has put a little more weight on system change leading to such a change as towards more flexible labor movement, and Poland has placed a little greater importance on producing more economic growth (as observed by the huge amount of subsidy for the coal industry). Various ways of transition should be understood as evolutionary phenomena accompanied by a variety of diversities.

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Chapter 6

Consequences and Trends of Japanese FDI in China and Central Europe

1. Introduction The purpose of this chapter is to analyze the Japanese foreign direct investment (FDI) in transition economies. Generally speaking, transition economies have more barriers to attract inward FDI compared with advanced industrialized economies. We focus our attention in this chapter on China and Poland as host countries, both of which have their own characteristic barriers for inward FDI in systemic sense. Also we concentrate on Japan as a home country, whose companies are recognized to be risk-averse. Issues analyzed in this chapter are the following three: (1) Based on risks related to systemic transition, we investigate motives1 and determinants of Japanese FDI in Central Europe and China. (2) Taking into consideration the above-mentioned characteristics of China and Poland, and Japan, it is usually insisted that the scale of Japanese FDI in China and Poland has been rather small. We analyze here whether or not their scale is reasonable. (3) We examine ways among countries concerned to alleviate system-related risks focusing our attention on “sovereign partnership approach.”

1 We use the terms “motive” and “determinant” in this chapter, which mean to be asked what kind of motive leads investors to FDI, and to be asked what kind of mechanism works for investors to decide their FDI, respectively. We focus our attention mainly on motives of Japan’s FDI.

213

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The main topic of this chapter, thus, is different from Chapter 5, but since the background is almost the same, almost all tables (with texts) are shared with the previous chapter. This chapter has three sections, which are (1) Background, (2) Current situation on Japanese outward FDI, and (3) Analysis. Each section has the following contents. In the first section, we have a general view on Central Europe and China, and also a short look at inward FDI in Central Europe and China. In the second section, we examine in detail Japanese FDI in Poland, and in China. In the third section, we insist an issue on the scale of Japanese FDI in Poland and China. Also in the third section, we investigate a regime to develop outward FDI by risk-averse investors into risky countries, which is followed by a short conclusion.

2. Background 2.1. An overview: Central Europe and China We have a short overview in this section on transition economies concerned, which are Poland, Hungary and China. Poland has started its transition since 1990 and adopted a radical approach, and Hungary a gradual one. The Hungarian reform has started much earlier than Poland, in 1968. China has a different history on systemic transition which started at the end of 1978, and they say China has been managed by the socialist market economy principle. Table 5.1 shows basic indicators for the three countries. With regard to Population and GNI (Gross National Income) in China, they were beyond comparison with the other two countries, 33.7 times and 127.6 times greater than Poland’s and Hungary’s respectively (in population), and seven times and 22 times larger than Poland’s and Hungary’s (in GNI). China’s per capita GNI was 5.8 times less than Hungary and 4.8 times less than Poland. Inward FDI flow received by China in 2002 was US$52.7 billion, and in Poland US$4.1 billion, in Hungary US$0.86 billion, and cumulative totals in 2002 came to US$447.9 billion (China), US$45.1 billion (Poland), and US$24.4 billion (Hungary). Per capita

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inward FDI stock in 2002 in Poland and in Hungary was 3.3 and seven times more, respectively, than in China. Other development indicators highlight other characteristics. GDP growth rates in China, Poland and Hungary were 9.5, 4.7 and 2.4 percent per annum respectively during 1990–2003. Gini coefficients in Poland (1999) and in Hungary (1999) were 0.316 and 0.244 respectively, both of which seemed to be rather moderate income disparity. However, China’s Gini coefficient (2001) reached 0.447, which seems to be significant. Agricultural and industrial value added as shares of GDP (2003) in China was much higher than in Poland and Hungary, but China’s service share was less. The high technology component of Poland’s manufacturing exports was only three percent in 2002, far lower than Hungary (25 percent), and China (23 percent). Also, Poland’s competitiveness ranking was correspondingly inferior (57th in 2005), compared with China (31st) and Hungary (37th). China has much less of tax revenue percentage of GDP, whose share was 4.9 percent in 1997, than Poland (35.2 percent) and Hungary (32.5 percent). The corruption perception index (which means 10 is highly clean and 0 is highly corrupt) of 2004 reflects all three countries poorly. China is the most corrupt, followed by Poland and Hungary. They rank China 71st (of 145 countries, 3.4), Poland 67th (3.5) and Hungary 42nd (4.8). Several indicators in this section generally illustrate rather different position of Poland compared with China and Hungary.

2.2. Inward FDI in Central Europe and China 2.2.1. Polish economy: The general situation We have here in this section, the general situation of Polish economy. Key statistics on Poland’s economic performance 2000–2005 are presented in Table 5.6. Real annual GDP growth is positive, but low ranging from four percent in 2000 to 3.4 percent in 2005.

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Unemployment is more serious, in the vicinity of 20 percent, which is purging the inefficiency of state-owned enterprises, concentrated in coal and agriculture. The government hopes that the problem will soon be alleviated as efficiency rises in “the second wave of restructuring” (WERI, 1999/2000). There are also pronounced regional disparities in unemployment. According to GUS (annual) and WERI (annual), we recognize unemployment situation in each voivodship (region). It is made clear, for example, the unemployment rate in Mazowieckie was 7.3 percent and in Warminsko-Mazurskie (1997) it was 19.7 percent, and unemployment rates in 2003 drastically increased to 15.1 percent and 30.6 percent respectively. What we have to understand correctly is that the 20 percent unemployment rate undoubtedly indicates the inefficiency of the Polish economy, and it is necessary for Polish economy to decrease the budget deficit to satisfy the Maarstricht Convergence Criteria. As far as structural reforms are concerned, as illustrated in Table 5.8, it shows that Poland entered the “second wave” in 2000 with an index score of 86. The Czech Republic and Hungary are further along with index reading of 93. Table 5.9 points out the regional GDPs in Poland. It shows as De Broeck and Koen (2000) mentioned “a significant increase in regional disparities between 1992 and 1996.” These spreads are large, but far smaller than their Chinese counterparts displayed in Table 6.1.2 Table 5.10 shows the special features of Polish privatization in comparative perspective. In 1991, Poland’s share was much higher than other countries, but at the end of the 1990s it became less than other countries particularly than Russia. Table 5.11 demonstrates that China too quickly caught up with Poland in the industrial sector. EBRD classified the ways of privatization (EBRD (1997)), and clarified the primary method of Hungary as sales to outside owners, of the Czech Republic as voucher privatization, and of Poland as management employee buyout. 2 On income disparities in China, see, for example, Chen Yun (2001), World Bank (1997), and Knight and Song (1999). Also see the following section on details of income disparities in China.

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Consequences and Trends of Japanese FDI in China and Central Europe Table 6.1

Average of top five over average of bottom five

217

Regional GDPs (China)

1955

1965

1975

1985

1995

4.95

4.15

5.82

4.38

4.57

Source: Chen and Chen (2003), pp. 1–2, and authors’ calculation.

In Poland, 18 percent of firm privatization was achieved through the sales of capital, as indicated “large state-owned companies with a good financial situation” were rather in small number.3 We believe that delayed privatization and liberalization explains Poland’s high unemployment rate, its low competitiveness ranking, weak high-tech exports, and low structural reform index score, etc. Collectively, this evidence indicates that Hungary and the Czech Republic are more efficient, and therefore have been more attractive for foreign investors.

2.3. General trends of inward FDI in Central Europe Since the beginning of the 1990s, the inward FDI in Central Europe has been fundamentally unchanged, the Visegrad three countries (Poland, Hungary and the Czech Republic) have accounted for 70 percent of the total. Table 5.2 presents the main trends. Inward and outward FDI stocks as a percentage of GDP points out another trend of Visegrad three countries (and China). As Table 5.3 shows, the remarkable increase of percentage in the Czech Republic reached more than 50 percent and rather saturated situation (but increasing share of outward FDI) in Hungary, and still less than 25 percent share in inward FDI (and less than one percent share in outward FDI) in Poland. A gradual but recently extreme increase of the GDP percentage of inward FDI is indicated in China. The main investors in Central Europe are Germany, France, the USA, the Netherlands, etc. Table 6.2 illustrates major investors in 3

With regard to privatization in Poland, see, for example, Morita (2004).

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Table 6.2

France USA Germany Netherlands Italy UK Total

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2000

2001

2002

2003

11.0 14.7 17.3 9.2 9.1 5.9

17.3 16.1 12.9 9.2 7.5 4.8

19.2 14.7 13.4 8.6 6.6 5.0

19.8 14.2 12.8 9.5 6.0 6.6

20.0 12.5 12.1 14.2 5.5 5.3

100.0

100.0

100.0

100.0

100.0

Source: JETRO (Warsaw office).

Poland. Major home countries of FDI vary from case to case, but in all instances the EU is the principal supplier of FDI. Regarding motives on inward FDI in Central Europe, there have been numerous studies on it. The most dominant explanation is domestic market-seeking. As a matter of fact, after the opening of Central Europe, Western companies entered the market to gain market access to the host market, as EBRD (1994) confirmed. An econometric study conducted by UNCTAD for 142 countries, revealed that the market scale of the host nation was a dominant factor during 1980–1995, although there has been considerable variation across countries, especially in recent years (p. 140). Another UNCTAD study, this one focused on CE FDI 1993–1997, identified low labor costs as an important explanatory variable when the local market scale was not significant enough to attract foreign attention (UNCTAD, 1998, pp. 286–287). As far as statistical investigations are concerned, for example, Mencinger (2003) submitted interesting causality and reversed causality mentioning that a hypothesis of “FDI affects economic growth” was adopted and the opposite hypothesis, “economic growth attracts FDI” was rejected. Statistical investigations upon the issues have had no standardized result. Generally, it seems that “large markets and high-income markets attract more FDI” (UNCTAD, 1998, p. 135), but there is considerable temporal and special variation.

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2.4. China’s economy: The general situation Key indicators of China’s economic performance 2000–2005 are pointed out in Table 5.29. China’s economy has recorded a good performance meaning high real GDP growth rate, low rate of inflation, moderate rate of unemployment (of registered one in urban area), and net large amount of foreign exchange reserves. The figures on the budget deficit are a little less than three percent. However, as often indicated, the serious problem that accompanied transition and development in China was income disparity. In the 1980s, crucial reasons behind the regional income disparities were (1) systemic difference, which pointed out the gap of economic growth rates between more centrally-planned regions with traditionally state-owned sectors and more market-oriented regions with non-state-owned sectors, and (2) policy differences, which states that the regional imbalance arises from coastal open strategy. In the 1990s under the all front policy, the policy differences were reduced step by step (at the end of 1992, development zone boom occurred all over China and competition for advantageous policies went too far), and since January 1994 a series of institutional reform in tax and budget were put into force. In particular, the then-Prime Minister Zhu Rongji employed the three reforms of state-owned enterprises, financial system and administrative system, under which environments for reforming state-owned enterprises were steadily prepared. It implied the releasing period for such regions as Shanghai from restricted to traditionally state-owned enterprises. The determinants of disparities in China in the 1990s have been towards more generalized ones as indicated in development economics, from systemic difference (due to the difference between state-owned sectors and non-state-owned sectors) and policy difference (arising from imbalance in open policy) although they have been partially remained. The actual situation on income disparities in China is as follows. With regard to the Gini coefficient, The World Bank, for example, announced that the Gini coefficient in China as 0.376 in 1992, 0.403 in 1998 and 0.447 in 2001.

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More precisely, there have been three kinds of Gini coefficient in China, which are Gini coefficient of all of China, Gini coefficient within urban areas, and Gini coefficient within rural areas. Figures on Gini coefficient announced by various research institutes and research groups were rather different. For example, March 2004 announcement by income distribution research team (of Economic Research Institute in Chinese Social Science) showed 0.454 for all of China, 0.319 within urban areas and 0.366 within rural areas, in 2002. Also, statistics by National Statistical Office indicated 0.397 for all of China, 0.3 within urban areas and 0.3361 within rural areas in 1999. After the reform and open door policy of 1978, per capita income within both urban areas and rural areas rapidly increased and also income disparities (for the whole of China, within urban areas and within rural areas) expanded remarkably. The Gini coefficient of the whole of China went up to 0.397 in 1999 from 0.341 in 1988. Such an increase of the Gini coefficient was explained as arising compoundly from regional disparities, disparities among sectors, disparities among several types of enterprises, disparities between urban and rural areas, etc. Decomposing the Gini coefficient into urban areas and rural areas points out that as for Gini coefficient within urban areas, it went up 0.32 in 2000 from 0.16 in 1978. During this period, some years correspond to discontinuous increases. The 1985 increase was chiefly due to institutional reform in wages and prices, and the increments of 1988, 1993 and 1994 were mainly caused by the aggravation of inflation. The 2000 increase was due to the wage adjustment policy. The Gini coefficient within rural areas remarkably showed disparity expansion, which was increased from 0.21 in 1978 to 0.35 in 2000. Disparity within China’s rural areas has been produced by conditions such as the initial one (due to differences in industrial structure, differences in production factors accumulation), geographical reasons (whether or not being next to big city, whether or not to be in eastern area), etc. Rich rural areas are enjoying opportunities to gain non-farming income, which consists of farming industry, trade, transportation, construction, service, etc., and also opportunity to work at the neighboring urban areas. Non-farming income is a crucial factor to income disparity among rural areas.

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Table 6.3 Per capita income disparities of rural and urban areas in China Engel’s Coefficient Ratio Urban/Rural

Rural

Urban

1978 1980 1985 1989 1990

2.57 2.50 1.86 2.28 2.20

67.7 61.8 57.8 54.8 58.8

57.50 56.90 53.31 54.50 54.24

1991 1992 1993 1994 1995

2.40 2.58 2.80 2.86 2.71

57.6 57.6 58.1 58.9 58.6

53.80 53.04 50.32 50.04 50.09

1996 1997 1998 1999 2000

2.51 2.47 2.51 2.65 2.79

56.3 55.1 53.4 52.6 49.1

48.76 46.60 44.66 42.07 39.44

2001 2002 2003 2004

2.90 3.11 3.23 3.12

47.7 46.2 45.6 47.2

38.20 37.68 37.10 37.70

Source: Chinese Statistical Yearbook, 2005 and authors’ calculation.

Table 6.3 revealed income disparity as a ratio of urban to rural. Engel’s coefficient was decreasing both in urban and rural areas. With regard to the data showing how many times more in urban per capita income than in rural, (except the years of 1978–1985) an increasing trend was recorded. Although the disparity reduced in 1978–1985, after thus its trend expressed fluctuation which was followed by an expansion reaching more than three in 2002 and 2003. Per capita GDP disparity among the three regions — Eastern, Central and Western — points out (using a per capita GDP in the Eastern region as criterion of 100) that in 1980 in Central and

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Table 6.4

Per capita GDP and disparity among three regions in China

Per capita GDP (yuan) East Central West Ratio Central/East West/East

1980

1990

2000

2002

2003

598 391 306

2240 1338 1156

11334 5982 4687

14363 7047 5536

18931.4 8293.3 6493.3

0.65 0.51

0.60 0.52

0.53 0.41

0.49 0.39

0.44 0.34

Note: Per capita GDP is in nominal. Source: Chinese Statistical Yearbook, annual, and authors’ calculation.

Western regions it equaled to 65 and 51 respectively, in 1990 it was 60 and 52 each which showed (increase in the Eastern region and) slight reduction in the Central region. However after this, it became 53 and 41 in 2000, 49 and 39 in 2002, 44 and 34 of 2003, which displayed remarkable increase of Eastern region’s income and its expansion compared with Central and Western regions (see Table 6.4). The issue is questioning if disparities in China correlate with inward FDI is an important one to be seriously investigated.4

2.5. General trends of inward FDI in China The inward FDI in China had a few peak periods, the first was 1984– 1985, the second was 1988–1989, and the third was 1991–1993. The third peak years was led by Deng Xiaoping’s Southern Tour. In the second half of the 1990s, inward FDI in China stagnated mainly because of Chinese government regulation against inward FDI (see Table 6.5). Since the beginning of the 1990s, there were several changes in the inward FDI in China due to its industrial policy, which refers to the governmental policy of allocating resources to particular regions and industries. The main structure of investors in China was basically unchanged as displayed in Table 5.14. The Hong Kong share of inward FDI in 4

However, we have no investigation on it here in this chapter.

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FDI inflows in China (flow)

Year

US$ million

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

11,156 27,515 33,787 35,849 40,800 44,236 43,751 40,319 40,772 46,846 52,700 53,505 60,630 60,320

Source: UNCTAD, World Investment Report, annual, Chinese Statistical Yearbook 2005, Statistical Bulletin of National Economy and Social Development in China 2005, and authors’ calculation.

China decreased to around 30 percent, but it still has overwhelmingly the largest portion. As FDI from the British Virgin Island seems to be originally coming from Taiwan (JETRO, annual), Chinese business network has in the vicinity of 50 percent. Chen, Chang and Zhang (1995) insist that FDI has “been associated with phenomena such as: (a) the accelerating uneven development between the coastal and inland provinces, (b) worsening income distribution.” Chen and Demurger (2002) describe that “comparisons of TFP dispersion among Chinese provinces show that the inflows of FDI might have induced greater regional disparities for more open sectors” and “coinciding with the usual findings on the driving role of FDI in regional growth divergence.” Also, Tseng and Zebregs (2002) mention that both “at the national and the provincial level, empirical studies have found a strong correlation between GDP and FDI inflow in China. The causality between the two variables runs in both directions.”

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Empirical investigation on FDI effect to the Yangtze River Delta region in 1990–1995 by Chen (2001) suggests that FDI inflow in the region had significant effect on regional GDP growth rate and regional disparities among the cities in 1990–1992; however, after then it was not significant. The insignificance was explained as follows: (1) due to the development boom which started from Deng Xiaoping’s Southern Tour, FDI covered the entire region of the Yangtze River Delta, (2) overall inward FDI reduction at the second half of the 1990s took effect to the insignificancy, and (3) active nonstate-owned sectors (except FDI) contributed to the rejection of significant relations between FDI and region’s growth and disparity. Table 5.15 displayed regional distribution of FDI (percentage of national total). It reveals the described concentrating trend towards the Yangtze River Delta region, particularly Jiangsu province, whose share reached 25.1 percent in 2004. The main reason for this arises from excellent economic performance in the region. The position of the Yangtze River Delta region (percentage of national total) in 1999 and 2004 was shown in Table 5.15. Each region revealed high speed growth rate in the respective indicators. Share of Yangtze River Delta region in 2004 was 10.6 percent (in population), 24.9 percent (in GDP), 36 percent (in trade amount), and 34.6 percent (in inward FDI actual). It undoubtedly described the Yangtze River Delta region as the center of China’s economy and international economic activities. There are a variety of investigations of determinants for FDI in China. For example, Liu, Song, Wei and Romilly (1997) analyze them with several potential determinants based on theoretical explanations. Their empirical results show the four determinants, which are relative wage rates, relative GDP, relative real exchange rates, and export and import. Tseng and Zebregs (2002) study the determinants of inward FDI and indicate that a large domestic market, low wage costs, improved infrastructure, open FDI policies (especially establishment of the Open Economic Zones) are helpful factors to attract FDI. Research results on determinant and motive of inward FDI in China seem to be free from ambiguity. Both market-seeking and export-seeking are substantial on it.

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3. Current Situation on Japanese Outward FDI5 3.1. Japanese FDI in Poland Economic relations between Japan and Poland are still stagnant. The export ratio to Japan of the overall Polish export in 2003 was only 0.2 percent (former EU 15 countries 68.8 percent, China 0.5 percent). The import ratio from Japan of the overall Polish import indicated also only 1.9 percent (former EU 15 countries 61.1 percent, China 4.2 percent). Japan got a surplus throughout in bilateral trade. Cumulative Japanese FDI in Poland was US$351 million in 2002, which shared only 0.6 percent of the total. Table 6.2 shows that the largest FDI country in Poland in 2004 was France (20.1 percent), which was followed by the USA (18.2 percent), Germany (15.0 percent) and the Netherlands (12.5 percent). Since the 1980s, it was often questioned why the scale of Japanese FDI in Poland was so small. Such stagnated Japanese FDI in Poland, which was as recorded 0.6 percent has been persistent. Table 6.6 shows the total amount of Japanese FDI in Poland, and the general situation of it has been as follows.6 Table 6.6

Japanese FDI in Poland (stock)

Year

US$(10,000)

1996 1997 1998 1999 2000 2001 2002 2003 2004

8300 9500 14,800 24,200 36,160 51,750 35,180 25,800 36,230

Source: JETRO (annual).

5

As often indicated, even these are actually Japanese companies’ FDI in Poland, substantial portion of which are recorded as European companies’ FDI. It might be difficult to recognize correctly the actual Japanese FDI. This section is indebted to JETRO (annual) and, Inagaki and the 21st China Research Institute (2005). 6 For the details of Japan’s FDI in Poland, see Morita (2002, Chapter 8).

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Until the end of 1989, Japanese FDI in Poland was by only one company, which was established in August 1989, and we undoubtedly think that the Japanese FDI in Poland was inactive compared with the USA and (West) European companies, and with South Korean companies. In 1990–1991, we found eight Japanese FDIs with US$3 million (in a stock sense), all of which were subsidiaries for sales promotion. Three of them, MC Service Center, Toyota Motor Poland and SunMed, were wholly owned. However, there was no manufacturing company. The other six were newly established by the end of September 1992 with another US$2 million. Eight of altogether 14 were wholly owned. No significant progress was made till March 1993, though it was announced that the total number of Japanese FDI was 19 (five more than the previous year), each scale of which was small. The years 1993 and 1994 saw a significant increase in Japanese FDI in Poland. It was reported that cumulated amount of Japanese FDI increased to US$12 million coming from Matsushita-Phillips for battery production, Marubeni for industrial boiler production, JT for Tobacco production, etc., and another 26 cases. JETRO Warsaw Office found, that at the end of October 1995, 30 Japanese FDI with US$3 million more than the previous year, but most of them were subsidiaries for sales promotion. The years 1996 and 1997 saw further increase in Japanese FDI in Poland. JETRO questionnaire research on 800 Japanese subsidiaries established in 18 European countries declared that the most attractive country for Japanese FDI in Europe was the UK, which was followed by Czech Republic, Slovakia, Poland and Hungary. 1996–1997 was the first period of Japanese full-scale manufacturing FDI in Poland with large amount of investments, which showed till October 1996 total Japanese FDI reached 38 companies and US$8.3 million, and till June 1997 the total number and amount increased to be 48 and US$126.8 million respectively. Most of Japanese FDI in Poland then were in the tertiary sectors, but full-scale manufacturing FDI such as Isuzu, NK Poland, Chiyoda Corporation and Penta Ocean started.

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Japanese FDI in Poland was still very small. According to the then PAIZ (which means less than 1 million FDI was not counted), at the end of the first half of 1998 Japanese cumulative FDI totaled 11 with US$178 million. Japanese share of overall inward FDI in Poland in a cumulative sense was 0.8 percent. Major FDI in 1998 was NSK-RHP Europe-Nichimen with Polish FLT Iskra. It was the first of Japanese FDI participating in Polish privatization company, FLT Iskra, which had 80 percent shares. PAIZ statistics also indicated Japanese total amount of FDI till the end of 1998 was US$198 million whose ratio was 0.7 percent. As mentioned above, we recognize the trend of motive shift from market-seeking to export-seeking in 1997–1998. A typical example of the shift was the Bridgestone and Firestone Polska, which was established in Warsaw, in November 1994, for the sales promotion with Mitsui Co. and Benelux Mitsui Co., with 220,000 zlotys. The sales promotion corporation was dissolved in July 1998 and a new corporation established collaborated with Stomil Poznan (Polish stateowned tyre producer) to reinforce tyre production in Europe with about US$63 million. This was a typical example revealing a shift from market-seeking to export-seeking. In 1997 and 1998, Japanese FDI in Poland concentrated more on manufacturing sectors particularly automobile parts production (expanding existing establishments and creating new ones) related with Toyota FDI providing for foreign automakers in France, UK, Germany, etc., due to cost advantages. Needless to say, such FDIs have been promoted by Polish accession to EU. Toyota chose Poland for such production due to various reasons including (1) favored treatment of 10 years exemption of corporate tax, (2) advantages of the Walbrzych Special Economic Zone, which displayed a close proximity to the German border (100 kilometers) with easy access to parts makers, high unemployment meaning a large pool employing skilled workers, abundant subterranean water for industrial use, and (3) the Legnica area was already filled by German VW (Chunichi Shinbun, 5 November 1998). Japanese FDI in Poland after 1997 and 1998 was inactive, and the above-mentioned shift became clearer. Isuzu Motors Polska and

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Bridgestone and Firestone Polska started their productions in 1999. Also in 1999, Tokai Rubber Industries and Mitsui Co. established TRI Poland in joint venture with Stomil Wolbrom to produce rubber products for automobiles with about one billion yen, and Sumitomo Electric started to build automobile electric parts (wiring systems) production factory in Rawicz of Wielkopolskie. NSK Iskra transferred their bearing production to Poland from the UK to expand the production, and also Mitsubishi Corp. established MCTI Polska for transport, storage and communication in 2000. In August 2001, Mitsui Corp. agreed with developing an industrial development area for Japanese investors in Zarow, which was authorized as a Special Economic Zone and was expected to attract automobile parts producing companies. Also in October 2001, the then-Bank of Tokyo-Mitsubishi acquired a license of their business which was the first of Japanese banks. There were four Japanese manufacturing companies which started their production in 2002, all of which were automobile parts producers. Toyota Motor Manufacturing produced transmission in Walbrzych Special Economic Zone. Mitsuboshi Belting established MOI Tech Europe Sp. in Pruszkow to provide timing belts to Japanese and European automobile manufactures. Toyo Seal Industries started to produce rubber products in Tychy, and Toho Industrial began machinery and equipment production in Radom. In 2003 also, Japanese FDI in Poland centered on automobile and related industries. Toyota Motor Industries Poland established a diesel engine factory in Jelcz-Laskowice with 200 million Euro, to provide the diesel engine to UK factory. Amatsuji Steel Ball founded a factory of machinery for the production and use of mechanical power in Zarow, and NGK Insulators made a factory to supply nonrefractory ceramic goods in Gliwice, both of which started in 2003. Toyota Motor Manufacturing decided to expand manual transmission production capacity and to produce gasoline engine, for a new car manufactured in Czech Republic, with PSA in Walbrzych. JETRO (2003) described Polish advantages of attracting Toyota were: (1) biggest labor population in Central Europe of 18 million and, due

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to high unemployment rate of around 18–20 percent, abundant work force was available, (2) wage rate rise in 2003 was not substantial, and (3) labor quality was good (p. 331). As of May 2004, JETRO Warsaw Office clarified that, of more than 100 Japanese FDI in Poland, 34 were manufacturing. Automobile and related industries were also the main Japanese FDI in 2004, which were SANDEN (automobile related products), DAICEL (automobile related products), NTK (ceramic products), Fuji Seiko (cutting tools), Toyota Boshoku and Denso (engine related components), Toyota Tsusho and Daiki Aluminum Industry (aluminum products), Tsubaki-Hoover (bearing), Yagi Industries (bearing), etc. The main motive of establishing factories was to export to West European markets (JETRO, 2005). JETRO Warsaw Office report said that as of May 2005, total number of Japanese FDI in Poland was more than 110, of these 36 were manufacturing.7 Japanese FDI led by automobile and related industries in Poland remained unchanged after 2005. The main motive of Japanese FDI in Poland shifted from marketseeking to export-seeking in 1997–1998, whose trend has become clear after 1999 brought about by automobiles and related FDI. The export-seeking motive has been, needless to say, promoted by Polish accession to EU.

3.2. Japanese FDI in China After the reform and open door policy by Deng Xiaoping, China has had close relations with international economy. China’s overall trade was US$509.8 billion in 2001, 620.8 in 2002, and 851.2 in 2003, whose rank of trade amount, according to WTO, reached fourth after the USA, Germany, and Japan. Japan’s ratio to China’s overall import in 2003 was 18 percent, and the ratio to export was 13.6 percent. Principal countries for China’s export then were the USA (21.1 percent), Hong Kong (17.4 percent), 7

It showed the ratio of manufacturing (stock) was about 33 percent, which was much less than the ratio of manufacturing (flow) of Japan’s FDI in China of more than 80 percent. Although it might be important to examine reasons for it based on differences between flow and stock, we have no investigation here in this chapter.

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and Japan, and China’s main countries of import in 2003 were Japan, Taiwan (12 percent), and South Korea (10.4 percent). Japan’s overall trade amount reduced, but trade with China expanded. Total trade amount of Japan with China in 2003 equaled to US$133.6 billion in which Japan had a deficit of US$18 billion. With regard to trade partners of Japan in 2003, the USA had the biggest ratio in export of 24.6 percent, followed by China (12.2 percent) and South Korea (7.4 percent), and China shared the biggest (19.7 percent) in import followed by the USA (15.4 percent) and South Korea (4.7 percent). Japan’s ratio to inward FDI in China (flow, actual base) was 7.2 percent in 2000, 9.3 percent in 2001, 7.9 percent in 2002, 9.4 in 2003, and 9.0 percent in 2004, whose rank of inward FDI in China in 2004 was fourth after Hong Kong (31.3 percent), the British Virgin Islands (11.1 percent) and South Korea (10.3 percent). China’s ratio to Japan’s overall outward FDI (flow, report base) showed 2.0 percent in 2000, 4.6 percent in 2001, 4.8 percent in 2002, 8.7 percent in 2003, and 12.8 percent in 2004, whose position of Japan’s overall outward FDI in 2004 was about the same as the USA (13.2 percent) even if it was third after the Netherlands (22.7 percent) and the USA (see Table 6.7). Table 6.7 Main host countries of Japan’s outward FDI (2004, flow) US$ million* Netherlands USA China Cayman Islands Oceania UK Panama Thailand Total

Ratio (percent)

8058 4677 4567 3947 1869 1789 1282 1184

22.7 13.2 12.8 11.1 5.3 5.0 3.6 3.3

35,548

100.0

Note: *Reported base (in Japanese MOF). Source: JETRO (2005).

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14

12

10

8

6

4

2

0

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 6.1

China’s ratio to Japan’s outward FDI (1987–2004)

Source: JETRO, annual.

Table 6.8

Japanese FDI in China (flow)

Year

US$ million*

1996 1997 1998 1999 2000 2001 2002 2003 2004

5131 3401 2749 2591 3680 5419 5298 7955 9162

Note: *Pledged base. Source: JETRO, annual.

Table 6.8 indicates flow amounts (pledged base) of Japan’s FDI in China. Figure 6.1 shows China’s ratio to Japan’s overall outward FDI from 1987 to 2004, which points out that after 1992 the ratio increased to peak at 8.8 percent in 1995, and then decreased to

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1.1 percent in 1999. The Japanese FDI in China became active after 2000. JETRO (annual) for example explained, the peak year of 1995 was led by the Chinese government’s attractive policy for inward FDI both in coastal and inland area. The share of manufacturing in inward FDI of 1995 was 80 percent, which contrasted with 10 percent in 1986. Japan’s FDI situation in China was as follows. At the beginning of the 1990s, China’s outward FDI when compared to that of Japan was small — 0.6 percent in 1989 and 0.9 percent in 1990. Japanese FDI in China for this period concentrated on export-seeking that was led by the Chinese government’s advantageous policy (which meant foreign companies with more than 70 percent export enjoyed 50 percent tax exemption) and on Northeast region particularly Dalian. China’s ratio became 1.4 percent in 1991 and increased to 3.1 percent in 1992, whose expansion came from income expansion in urban area. We recognized a trend of market-seeking FDI in industries such as telecommunications equipment, automobile and related, electric machinery. With regard to regional distribution, Dalian still received big amount of FDI, US$1.19 billion at the end of 1992, which was more than Shanghai (US$810 million), Shenzhen (US$555 million), Tianjin (US$367 million), and Beijing (US$121 million). It indicated that exportseeking FDI in Dalian was dominant for that period. The manufacturing share of Japanese FDI in China in 1990 was 46 percent and less than non-manufacturing. Large-scale FDI towards Shanghai started in 1993–1994, which led the above-mentioned shift to market-seeking. Also, big-scale automobile FDI in China began with Fuji Heavy Industries’ decision in Guizhou province jointly with Guizhou Airlines, etc., whose actual establishment was in March 1998. The manufacturing ratio of Japan’s FDI in China in 1994 was 72 percent, which was much higher than non-manufacturing. China’s ratio of Japan’s outward FDI as mentioned previously reached 8.8 percent in 1995, when also the motive shift from exportseeking to market-seeking became clearer. It was shown in 1995 that

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the manufacturing ratio was bigger (78 percent), and FDI into Yangtze River Delta particularly Shanghai and Jiangsu province expanded. The tendency towards market-seeking was recognized also in such bigscale FDI of retail sector as Yaohan (Wuxi) and Jusco (Qingdao), which was reflected by China’s GDP increase. Japan’s FDI in China rapidly shrunk in 1996. China’s statistics showed that the number of pledged FDI was 40.9 percent less than the previous year and the pledged amount reduction reached 32.4 percent less compared with the year before. JETRO (1998), for example, explained reasons of reduction, which were (1) disadvantageous change against FDI by Chinese government like re-examination of favored treatments, and (2) Japanese companies’ better recognition of China’s risk factors which made them more risk-averse than before. In 1997, the number of pledged FDI was 18.5 percent less than the previous year, and the amount was 33.7 percent less, reasons of which were (1) recession of Japanese economy, and (2) problems related to China’s economy such as illegal tax payment, transfer prices, difficulty of collecting bills. The number and amount of pledged FDI was 15.6 percent and 19.2 percent less respectively in 1998 than the year before, whose reasons were the same as in 1997. Also in 1999, number and amount of pledged FDI was 2.6 percent and 5.7 percent less respectively than the previous year. Both number and amount of pledged FDI were reducing but both decreasing ratios were much smaller. Reasons of the reduction were explained as follows: (1) restructuring of parent companies made China’s business to be reconsidered, (2) frequent changes of institution in China caused less transparency, (3) available investors had already invested, etc. (see JETRO). Even in the period of decreasing number and amount of pledged FDI, new projects were invested in China. With regard to automobile companies, for example, in 1996 Tianjin Toyota Motor Engine (engine production) and Dongfeng Nissan Diesel Motor (truck and bus production) were established. In 1997 Tianjin Toyota Forging (forging production), and Tianjin Jinfeng Auto Parts (steering and propeller shaft production) were founded, and in 1998 Sichuan Toyota Motor (coaster production), and as previously mentioned

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Guizhou Yunque Motor cooperated with Fuji Heavy Industries (Rex production), and Guangzhou Honda Motor (Accord and Odyssey production) were in existence. Japan’s FDI in China expanded again in 2000, whose pledged number and amount was 38.3 percent and 42.0 percent more respectively than the previous year. Factors for expansion were indicated as (1) China’s accession to WTO, (2) low labor cost, (3) China’s high rate of economic growth, mostly which seemed to be the WTO accession as both low labor cost and high economic growth in China were the same as in the 1990s. Japan’s automobile manufacturers invested in 2000 including in Guangzhou Isuzu Bus (bus production), Tianjin FAW Toyota Motor (Vios production), and Shenyang Shenfei Hino Automobile Manufacturing (bus production). Number and amount of pledged FDI in 2001 was 25.1 percent and 47.3 percent more respectively than in 2000. (Statistics in Japan declared a ratio of FDI in China to overall Japan’s outward FDI was 4.6 percent, and manufacturing shared 88.3 percent). Such trend showed a motive “to expand production and to promote sales in China” (JETRO, 2002). Questionnaire research by JETRO in October 2001 explained that, of altogether 300 companies responded to the questionnaire which had a plan to expand FDI, 287 intended to invest in China whose ratio reached 95.7 percent. The research also pointed out motives of FDI were as follows: (1) expanding production and sales at host countries (71.1 percent), (2) cost reduction (44.9 percent), (3) dealing with FDI of customers in Japan (24.7 percent), and (4) sales expansion to the third countries (18.8 percent) (JETRO, 2002). The shift from export-seeking to market-seeking seemed to be clearer. Such a market-seeking tendency was recognized in industries such as the automobile and consumer electronics industries. Sony, for example, in consumer electronics started to produce a laptop computer in Jiangsu province in 2002. Toshiba also began to produce a laptop computer in Shanghai (at Pudong Jinqiao Processing Zone) in 1998, and in Zhejiang province in 2002. With regard to automobiles, Honda started Odyssey production in Guangzhou, in April 2002, Toyota began Vios production in Tianjin, in October 2002, and Nissan

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began Cefiro production in Hubei province in 2003. Mazda started Premacy and 323 production jointly with FAW Group in Hainan province in 2001 and 2002. The number of pledged FDIs was 36.0 percent more but this amount was 2.2 percent less in 2002 than the previous year, which meant the amount per case decreased. The enlarging trend of marketseeking was unchanged, particularly the automobile market in China expanded. Honda, Toyota and Nissan invested more in China. Problems relating to sales in China’s market existed in 2002 and 2003, mainly were collecting of bills and a flood of fake products. In 2003, number and amount of pledged FDI was 18.5 percent and 50.2 percent more respectively than the year before, in which market-seeking FDI in China increased in every industry (JETRO, 2004). Japan’s automobile manufacturers had full scale production in China and also the FDI of parts makers was activated. It was undoubtedly due to “development of motorization in China” (JETRO, 2004). Toyota FDI was very constructive, which signed a joint production contract with FAW in April 2003, and started Corolla production in February 2004 and Crown production in 2005. The number and amount of pledged FDI in 2004 was 6.1 percent and 15.2 percent more respectively than the previous year. (Flow of FDI in 2004 showed that the number was 3,454 and the amount was US$9.16 billion). With regard to large-scale Japanese FDI, Toyota established engine production jointly with Guangzhou Motor in February 2004 and with FAW (in Changchun) in March 2004, it also started production and sales cooperation with Guangzhou Motor (to produce Camry). Honda began CR-V production in joint venture with Dongfeng Motor in April 2004 and Fit production also jointly with Guangzhou Motor in September 2004. Nissan completed its factory in Guangzhou in 2004 in cooperation with Dongfeng Motor to start Sunny and Bluebird production in May and Teana production in September. In the electric and electronic industry, large-scale projects such as Matsushita Hangzhou Industrial Park in Zhejiang province by Matsushita Electric Industrial were completed, in which companies for precision processing of compressor parts and for compressors for air conditioners were established.

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With regard to Japan’s FDI in China, a shift from export-seeking to market-seeking could be recognized in 1995, when also the ratio of manufacturing increased and total regional FDI towards Yangtze River Delta particularly Shanghai and Jiangsu province expanded. After some years of reduction, Japan’s FDI in China expanded in 2000, which revealed a clearer trend of market-seeking motive. Fundamental factors of the trend were (1) GDP increase and (2) institutional improvement towards inward FDI accompanied by WTO accession. However, several problems related to China’s market in particular the sales section were pointed out, which indicated (i) collection of bills, (ii) difficulty is recognising market needs, (iii) large number of fake products, (iv) information shortage with regard to potential partners on consignment production, (v) strict regulations against sales network construction, etc. China which has a huge potential market on the one hand and serious risks with inadequate information, etc. on the other, seems to hinder a risk-averse FDI.

4. Analysis 4.1. FDI-trade ratio and managerial resources disparity The above-mentioned situations displayed Japan’s FDI in Poland kept its scale small and its motive shifted from market-seeking to exportseeking particularly in automobile and related industries. Those were from (1) unsuccessful results of Poland’s radical transition than expected, and (2) freer movement of goods and factors with EU accession. Japan’s FDI in China showed that its motive shifted from export-seeking to market-seeking mainly in automobile and related industries, and consumer electronics industries, which was definitely recognized in 1995. Also in 1995, the ratio of manufacturing increased and regional total FDI towards the Yangtze River Delta, particularly Shanghai and Jiangsu province increased. Japan’s FDI in China expanded again in 2000, its motive indicated a clearer trend of market-seeking. Fundamental factors of the trend were made by (1) GDP increase, which seemed to be closely connected with successful gradual

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transition in China, and (2) institutional improvement on inward FDI accompanied by WTO accession. Major characteristics of Japan’s FDI as mentioned above might be brought about by large-scale FDI of automobile and related, and of consumer electronics industries, whose industries are with product differentiation. Based on such characteristics, we think a determinant of Japan’s FDI in Poland and in China is managerial resources disparity.8 Managerial resources disparity was originally insisted by Penrose (1956) and Komiya (1972). Komiya argued that managerial resources are pointed out as “the organization whose core is apparently made by manager and is substantially for knowledge and experience of business management, for market standing shown by sales, material purchase and finance, by technological and specialized knowledge including marketing methods, patents and know-how” (1972, p. 178). Also, it is explained that FDI arises from difference of profitability between economic activities in home country and in host country, which are caused by disparity of managerial resources between the countries concerned. It goes without saying that existence of managerial resources disparity does not automatically conduct to FDI. What we emphasize here is that actual FDI with managerial resources disparity needs a common norm, which seems to be provided by international regime. When we examine existence and function of international regime, first we investigate a degree of FDI scale in the context of international relations. It has been usually said, taking into consideration Japan’s overall FDI scale, Japan’s FDI scale in Poland has been very small,9 also Japan’s FDI scale in China has been kept small reflecting difficult international relations between the two countries as is said, cool politics and hot economy, and is mentioned it is not easy for Japanese companies to carry out successful FDI in China.

8

As referred previously, we focus our attention here mainly on motives of Japan’s FDI. Regarding determinants of FDI, see, for example, Horaguchi (1992), Tomiyama (2004). On determinants of inward FDI in Poland, see, for example, Morita and Stuglik (2000). 9 See Morita (2002), Chapter 8.

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We analyze here scale issues with FDI such as the concentration index and the trade linkage index. FDI concentration index is indicated as follows. Suppose Japan’s FDI in China (Poland), the index shows that, a value which says that the amount of Japan’s FDI in China (Poland) divided by the amount of inward FDI in China (Poland) is a numerator, and a value that shows the total amount of Japan’s outward FDI divided by the amount of worldwide outward FDI is a denominator, whose ratio of the numerator to the denominator displays the FDI concentration index. When the ratio indicates more than one, Japan’s FDI in China (Poland) is shown to be relatively bigger than in other countries. Table 6.9 points out the FDI concentration index of Japan with China and Poland, which shows that China had many years with more than one; however, Poland had all the years with less than 0.5. These FDI concentration indices reveal that China is a country receiving relatively a bigger scale of Japan’s FDI and Poland relatively a smaller scale. FDI activities involve more closely related factors such as culture, institution, etc., in countries and regions concerned than international trade. It is not easy to scientifically consider a reasonable scale of FDI between specific countries. We examine here the strength and weakness of international relations as expressed by the scale of international trade, which is shown by the trade linkage index. Table 6.9

FDI concentration index

Year

China

Poland

1996 1997 1998 1999 2000 2001 2002 2003 2004

0.819 1.626 0.828 0.424 1.043 0.790 1.000 1.826 2.610

0.112 0.092 0.150 0.312 0.478 0.161 0.108 0.087 0.341

Note: Index in Poland is calculated with total amount. Source: JETRO, annual and authors’ calculation.

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The trade linkage index is expressed as follows. Assuming that Japan’s trade with China (Poland), the index points out a value which shows that the amount of Japan’s export to China (Poland) divided by the amount of Japan’s export to all over the world is a numerator, and a value that shows the import amount of China (Poland) divided by the import amount of all over the world is a denominator, whose ratio of the numerator to the denominator indicates the trade linkage index. When the ratio shows more than one, Japan’s trade with China (Poland) is expressed relatively bigger than with other countries. Table 6.10 shows that the trade linkage index of Japan with China and Poland, which displays that China consistently had a value of 2.5 to 2.8, Poland has all the years a value of 0.2 to 0.3. Those trade linkage indices express that China is a country with Japan as a closer trade partner and Poland a distant partner. When we understand that the scale of trade points out to the degree of strength and weakness of international relations, international relations of Japan with China are strong as expressed by values of 2.5 to 2.8, and with Poland are weak as values displayed are 0.2 to 0.3. When investigating a reasonable scale of FDI between specific countries concerned, we think it is necessary to consider the strength and weakness of international relations between them. (It may be difficult to expect large-scale FDI between countries which have no international relations.)

Table 6.10

Trade linkage index

Year

China

Poland

1996 1997 1998 1999 2000 2001 2002 2003 2004

2.706 2.671 2.804 2.747 2.466 2.679 2.795 2.845 2.708

0.214 0.221 0.264 0.272 0.286 0.293 0.291 0.297 0.306

Source: JETRO, annual and authors’ calculation.

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FDI-trade index

Year

China

Poland

1996 1997 1998 1999 2000 2001 2002 2003 2004

0.303 0.609 0.295 0.154 0.423 0.295 0.358 0.642 0.964

0.523 0.417 0.568 1.147 1.671 0.549 0.371 0.293 1.114

Source: JETRO, annual and authors’ calculation.

We examine a ratio that consists of FDI concentration index as a numerator and trade linkage index as a denominator, which is called the FDI-trade index here. When the ratio equals to one, FDI relations between the two countries correspond with their international relations. When it shows more than one, FDI relations between them are more active than the expected scale from international relations, and when less than one, FDI relations between them are less active than expected. Table 6.11 displays the FDI-trade index. The index in China is constantly less than one (although the index in 2004 is approaching one), and in Poland it shows that the three years of 1999, 2000 and 2004 are more than one. Table 6.11 explains that the FDI relations of Japan with China are relatively weak in the light of the international relations between the two countries, and Japan’s FDI relations with Poland are not constantly weak in the light of their international relations. We therefore think that, considering the FDI-trade index, it is rather difficult to insist that Japan’s FDI scale in Poland might be small, and it could support the assertion that Japan’s FDI scale in China might be small.10 10

It does not mean, needless to say, that Japan’s FDI scale in China is an abnormal sample. (Examining whether or not it is abnormal needs another way of investigation. On such way of investigation, see Morita, 1998.) What we insist here is that, between the two countries which have close trade relations, FDI relations do not correspond to their close trade relations.

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4.2. Risk-averse FDI: Sovereign partnership approach As investigated earlier, Japan’s FDI scale in Poland might not be small in a comparative sense. Also, Japan’s FDI scale in China might not be large in a comparative sense. Why Japan’s FDI scale might be small in that sense? What are the reasons for it and what are the prospects of it? We will examine such issues in this section. (It goes without saying that a background insisting on the scale of Japan’s FDI in China and Poland is formed by characteristic risks to hinder inward FDI particularly for risk-averse investors.) The details shown in the previous section indicate that the motive of Japan’s FDI in Poland shifted from market-seeking to export-seeking in 1997–1998. Toyota Motor Corporation, for example, established Toyota Motor Poland, in December 1990, jointly with Nissho Iwai with 50 percent each to import and sell automobiles. Toyota reached the next stage at the second half of 1998, in which Toyota founded a factory to produce transmission for Yaris with Aisin Seiki group. It was not an automobile production but a parts production which was exported to the UK and France. With regard to a theory of determinants of FDI, as was mentioned before, there could be undoubted disparity of managerial resources between Toyota Motor Corporation and automobile companies in China and Poland. However, it is difficult to say with this that the scale of Japan’s FDI in China and Poland has been large. What are the reasons for Japan’s outward FDI scale in China and Poland? There are grounds for them to ask why possible Japan’s FDI could not be realized. With regard to Japan’s FDI in Poland, the Daihatsu case negotiated throughout the 1980s and the Asahi Glass case at the beginning of the 1990s (both were prevented by Italian Fiat and British Pilkington respectively) were observed and recognized as the main reasons for Japan’s FDI failure came from the weakness of international relations between them compared with European ones.11 11

When one of the authors (Morita) presented such cases at several international conferences, participants from Central Europe reported particular cases in which European companies prevented Japanese ones from advancing in European and other regions’ markets. They seem to display substantial effects of international relations on FDI pledges.

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Also, macroeconomic instability and less transparency of government policy of the host country could be effective for FDI decision. The FLT Iskra case, for example, which was taken over by Japan’s NSK and Nichimen competed with Swedish SKF to produce bearing did not have a good time due to a change of government. Japan’s FDI in China has been hindered by several risks, particularly those related to the sales section, collecting bills and a large amount of fake products. Those risks are caused by the delay in China on legal and institutional improvement. We also recognize that weak political relations between the two countries expressed as “cool politics and hot economy” seriously hinder the close FDI relations. They are risk factors closely connected with financing of FDI projects and macroeconomic instability. Large FDI projects particularly in developing and transition economies have been significantly influenced by governmental participation to cover risks with policy measures. Factors such as insurance to alleviate risks by governmental participation have been imposed on risky FDI in developing and transition economies. Morita (1997b), for example, approached the issue with models by Stiglitz and Weiss (1981) and McKinnon (1991). We also examine it in this chapter with Stiglitz and Weiss (1981) and McKinnon (1991) as well as “Inversion of the Coase Theorem” by Keohane (1984, p. 88) and “Sovereign Partnership Approach” by Rosefielde (Morita and Rosefielde 1994). Interpretation of the inversion of the Coase Theorem in this chapter is as follows. Japan’s inactive FDI in Poland in absolute sense has been faced by serious social costs, which are (1) an immature legal system, (2) inadequate information, and (3) transaction cost. The above three are costs referred by Coase to be market failure situation. As Keohane (1984) insisted, approaching it with Coase Theorem, when even one of the above three exists, it is reasonable to establish an organization called international regime among governments. When orderly, stable and active relations between countries could be recognized, social scientists usually call such a situation a regime. In order to correctly recognize an international regime, it is necessary to distinguish concepts of cooperation, harmony and discord. Keohane

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maintained, when “actors’ policies (pursued in their own self-interest without regard for others) automatically facilitate the attainment of others’ goals,” the situation is referred to be harmony and “no adjustments need to take place” (1984, p. 51 and p. 52, italics original). When each actor’s policies (pursued without regard for the interests of others) are regarded by others as hindering the attainment of their goals, if attempts cannot be made to adjust policies, it reaches to discord. However, if actors’ policies become significantly more compatible with one another, it leads them to cooperate (1984, p. 53). Keohane also referred that, although “regimes themselves depend on conditions that are conductive to interstate agreements, they may also facilitate further efforts to coordinate policies” and, on an argument about the functions of international regimes, it shows “how they can affect the propensity even of egoistic governments to cooperate” (1984, p. 57). International regimes have various definitions. For example, Ruggie (1975) defined a regime as “a set of mutual expectations, rules and regulations, plans, organizational energies and financial commitments, which have been accepted by a group of states” (p. 570). Keohane (1984) defined international regimes as “sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors” expectations converge in a given area of international relations (p. 57). The analytical purpose of this chapter is not a definition of international regime, and we define the term here as Keohane (1984) did. Along with Keohane, we regard “regimes as largely based on selfinterest” (p. 57) and “incentives to form international regimes depend most fundamentally on the existence of shared interests” (p. 79). Such shared interests contribute to maintenance and continuance of international regimes. Focusing our attention on Japan’s economic relations with China and Poland, the following four are assumed as shared interests: (1) mitigating uncertainty, (2) reducing information collecting costs, (3) having stability, and (4) reducing transaction costs. Taking into consideration orderly, stable and active economic relations provided by international regimes, relations of Japan with

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China and Poland have been in a stage of immaturity towards establishing international regimes. Until recently Japan’s relations with them seem to have no common principles, no common norms, no common rules, no common decision making procedures if compared to Japan’s relations with the USA and West European countries. As experts usually insist, Japanese companies are more risk-averse than USA and West European ones.12 It means Japan’s risk-averse companies tend to reduce FDI pledges more easily than the USA and West European when inadequate information and large transaction costs, etc., exist. (Furthermore, cost factors arising from market failures have a mechanism for making an economy more inefficient through moral hazard and reverse selection, etc.) Establishing international regimes works to improve legal systems, to eliminate false information, and to reduce transaction costs, which make risk-averse investors more attracted. What is the procedure for creating international regimes? Although we are not ready to fully embark on such a difficult issue, we try to present a possible explanation for it, which is called a “sovereign partnership” originally discussed by Rosefielde (Morita and Rosefielde, 1994). The sovereign partnership approach expresses cooperation between sovereign states with similar function of international regimes, which works to reduce risks in China and Central Europe. Rosefielde explained it as follows. It is a partnership to protect economic rights and interests for both investor companies and host countries through bilateral and multilateral agreements among sovereign states. Participants of it are the governments concerned, which take action standing for relevant corporations and persons of the sovereign states. Their relations of the parties are completely independent, by which their welfare could be increased. The reason such formal relations are important is to guarantee investor companies protection of their necessary interest under participation of the host government. The sovereign partnership agreement can provide investor companies legitimate rights in host countries, with which they can avoid the risk of being unlicensed. It is easily recognized in risky host countries that investor 12

See, for example, Bakos (1992), pp. 149–168.

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companies cannot be given enough legitimate rights. Home governments thus need to take action for respecting mutual sovereignty standing for investor companies (Morita and Rosefielde, 1994). In cooperation with the home government, it becomes possible to create order consisting of legal system improvement, etc., which is not easily established by transition countries. Business problems such as compensation for damages are tried to be adjusted within an agreement by governmental organizations. Dominant governmental organizations exercise, through sovereign partnership, leadership over subordinate organizations, for example, to approve and cooperate in adjusting business troubles. Such action is, needless to say, not based on altruistic reasons, whose raison d’eƒtre is expected benefits exceed expected costs. The sovereign partnership seems to bring about opportunities for more FDI and for more development of transition economies. Probability of success with such agreement could become more, when more countries participate in the joint insurance system.13,14 We investigate a reasonable explanation on function of international regime and sovereign partnership, by interpreting it in line with McKinnon’s analytical framework (1991), which is as follows. Figure 6.2 is originally from McKinnon (1991), where the real interest rate, r, is plotted on the horizontal axis, and the real expected return, π, is plotted on the vertical axis. R1, R2 and R2′ “lie below and to the right of the 45-degree ray” because of the adverse selection and the incentive effect, which shows real expected return increase more slowly than real interest rate, as assumed by Stiglitz and Weiss (1981). When insurance is introduced in such an economy with governmental agreement, what does it change? 13

As a matter of course, when such insurance system could be well organized led by self-interest, no international framework is necessary. However, shared interest leading to the insurance function is not coming from self-interest. We do not have more investigation on that issue. 14 We maintain in this chapter with thoughts of such multinational integration and organization as EU and WTO. It is possible to consider that sovereign partnership could be concluded between two countries as mentioned earlier, in which, for example, we might have a difficult issue to examine whether or not sovereign partnership is available between Japan and China. See Morita and Chen (2006) on this issue.

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Real expected return,

π R2 ’

π 2’

Rv

π1 R2

π2 0

Figure 6.2

r*

Real interest rate, r

Function of international regime and sovereign partnership

Being covered by insurance, financing “gets to keep extraordinary profits without having to pay the full costs of unusually large losses from risky” investment (McKinnon, 1991, p. 90), which displays insurance system making FDI more active. As Figure 6.2 shows, risky barriers of investment R2 are reduced by insurance, which allows expected return to be more as expressed by its shift towards R2′ . It seems to be the same effect as pointed out by Frey (1984) that, in risky investments, bilateral aid from Western countries contributed more investments (p. 81). The following two should be added on functions of insurance: (1) as Cho (1986) insisted, although it might be risky, more resources could be allocated to potentially productive investments, and (2) because of the ill-function in a screening role of interest rates, immoral conduct can easily take place, which should be under constant surveillance by governmental organizations.15 It goes without saying that insurance functions work to strengthen international relations by providing stability and safety which are 15 However, we have no theoretical ground insisting that expected returns provided by insurance exceeds expected cost.

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brought about by international regimes and sovereign partnership. Strong international relations make FDI among them less risky. On the contrary, when international relations are weak, it makes FDI more risky. Such degree of risk seems to be correlated with FDI scale. As we recognized in the previous section, it is difficult to say that Japan’s economic relations with Poland are strong, and their relations remain less active which make less expected returns compared with expected costs caused by several risks. Such less active relations lead to small scale Japan’s FDI in Poland in absolute sense.16 There are close trade relations between Japan and China. However, FDI relations between them are less close than their trade, which produce less expected returns compared with expected costs associated with China’s risk factors such as a flood of fake products. The less close relations are serious obstacles for sufficient scale FDI of Japan with China in a comparative sense.

5. Conclusion Short conclusions with the above findings are as follows: (1) As far as motives are concerned, we recognize a trend that the main motive of Japan’s FDI in Poland has shifted to export-seeking and of Japan’s FDI in China to market-seeking. It is reasonable to understand that the determinant of Japan’s FDI in Poland and China is the disparity of managerial resources accumulation. (2) Approaching with FDI concentration index and trade linkage index suggests that it is difficult to support an assertion maintaining that Japan’s FDI scale in Poland might be comparatively small, and an assertion insisting that Japan’s FDI scale in China might be comparatively small is supportive. (3) Prospectively sustained macroeconomic growth and more globally standardized rules provided by WTO and EU accession will become Japan’s FDI in China and in Poland more active. 16 It should be recognized that introduction of insurance in this chapter’s sense is a necessary condition to strengthen international relations.

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Part III

REGIONAL DEVELOPMENT AND GLOBALIZATION

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Chapter 7

The Economic Development and Regional Disparity of the Yangtze River Delta

1. Introduction 1.1. The purpose of this chapter In Yangtze River Delta which spreads out downstream of Yangtze River in China, we have recognized, since the reform and open door policy of 1978, various economic developments in each region such as Shanghai where it was formed to be a base of heavy industries during the 1950s and 1970s, Jiangsu and Zhejiang provinces which have a rather wide region of rural area. In this chapter, concentrating on the 1980s and 1990s, economic development and regional disparity in Yangtze River Delta are empirically analyzed and policy tasks in the future would be examined. Needless to say, because of the tasks Yangtze River Delta region has faced intensively reflect the same tasks for all over China since the 1980s, the analysis in this chapter paying attention on this region could become a meaningful lesson for the development of other regions.

1.2. The characteristics of this chapter: Based on earlier literatures Investigations on disparities in China have the following characteristics: First, as regions taken to be subjects to study for regional disparity were usually concentrated on (1) rather big scale, for example, among the three big regions (East, Center and West), among coastal and inlands, among provinces, (2) among regions within particular province, (3) between urban area and rural area, (4) among rural area, 251

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(5) among urban area, (6) between growing regions and stagnating regions since the 1980s. Second, in order to solve and alleviate issues on distortion arising from the coastal open strategy and on poverty, there have been many studies on respective regions. More detailed description of our investigations is as follows: First, as for examinations paying attention on rather big scale regions, Kato (1997) calculates regional disparities with Theil measure both among regions and within regions based on real per capita GDP, whose result shows that regional disparity within whole China has been expanding since 1990, caused by discrepancy in marketoriented reform processes between coastal regions and inland regions. Meng and Kawabata (1998) investigated the relationship between investment efficiency based on ICVAR and regional economic growth in terms of provinces and three big regions in China. They recognize as a result significant correlations between ICVAR value and manufacturing products of state-owned enterprises. Wu (1995a) analyzes the income disparity among provinces based on non-state-owned sectors, financial institutions, industrial structure. Second, as far as research concerning regional income disparity within province are concerned, more arguments insist on increased tendency since reform and open door policy. Khan (1983), for example, states that based on national census on family budget income disparity in rural areas within province caused by non-farming sectors which means that the degree of industrialization takes significant effects on it, and thus the disparity in more developed province has been more than less developed province. Khan’s investigation has been supported by Rozelle (1994), Hu and Wang (1995) and Nakagane (1996a). Third, with regard to income disparity between urban and rural areas, Chen Zongsheng (1995) has the result which says during 1981–1985 disparity increased and then decreased. Chen’s (1995) interesting conclusion is given by decomposing Gini coefficient to calculate the degree of contribution for total income disparity. According to him, income disparity within urban areas and within rural areas can be interpreted as being 0.14–0.17 to the total 0.26–0.29 and income disparity within rural areas is a little more than within urban area in the period concerned.

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Fourth, regarding income disparity within rural areas, Sato (1997) has regression analyses on disparity of per capita peasants’ net income among counties with industrial structure and factors toward market economy (which indicates commercialization ratios of agricultural products, etc.). Sato reaches the conclusion insisting on disparity of industrial structure such as percentage of non-farming sector productions as a crucial determinant. Fifth, as for income disparity within urban areas, World Bank (1997) reports it has gradually increased with less Gini coefficient than within rural areas. However, Du (1992) has a result by investigating income distribution structure among urban areas that per capita income disparity of urban areas in 1980–1988 is generally alleviated (except 1985) in terms of Gini coefficient and of the ratio in average of top 10 percent over average of bottom 10 percent. Also, Zhong (1998) proves taking into consideration price level difference among regions that as far as urban area people are concerned, real purchasing power difference has decreased in 1985–1995. Zhang (1999) examines the degree of contribution to and the change of each income origin of urban household income based on household census in whole China, which leads to the conclusion that the main factors for the disparity are due to wage income, etc. and the effect of allowance in kind is remarkably diminished. Sixth, on the disparity between growing area and stagnating area, Wu (1995a) emphasizes on comparison between the Jiangzhe Model (led by TVEs) and the Guangdong Model (led by foreign-owned enterprises), and Watanabe (1995) analyzes it by dividing the Eastern regions into two groups of growing and stagnating, whose results emphasize that regional disparity in China arises from more efficient activities of non-state-owned enterprises and depressed situation of state-owned enterprises. Yu (1997) indicates the relatively poorer situation in rural areas by analyzing the disparity based on indicators such as labor productivity, capital productivity, capital-labor ratio, etc., by classifying 30 provinces, direct controlled municipalities under central government and autonomous regions into five clusters of direct controlled municipalities under central government, heavy industries, market economy, minority race and rural areas.

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Figure 7.1

Cities (municipalities) in the region of the Yangtze River Delta

This chapter, on the other hand, has the following characteristics: First, we take up the Yangtze River Delta region which has been paying more attention on its economic development in the 1990s to be investigated as a topic here, and examine the region by classifying the delta regions in a broad sense and in a narrow sense (see Figure 7.1). The delta region in broad sense includes 21 cities (municipalities) meaning Shanghai directly controlled municipality under central government and the whole area of Jiangsu province and Zhejiang province; on the contrary, the delta region in narrow sense has 14 cities (municipalities) closely encircling Shanghai. The geographical area of the 14 cities

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(municipalities) concerned here of Yangtze River Delta in a narrow sense is generally consistent with the Yangtze River Delta selected as one of the coastal open regions in 1985. What should be indicated here concerning this chapter is as follows: as for the above-mentioned “urban areas” usually means the urban built-up area (usually it is divided into several districts) in which citizens with urban households registered live. “Cities (municipalities: Dijishi)” in this chapter point out the whole area of cities (municipalities) administration areas in which, besides downtown, several counties are supervised by municipalities. It therefore means that the “Cities (municipalities)” in this chapter includes both urban build-up area (“Cities (municipalities)” indicated above) and counties classified as farming regions (“rural areas” mentioned above). Due to the complicated situation of “Cities (municipalities)” in China, we have nonfarming population showing the degree of urbanization as a probable explaining factor for disparity among cities (municipalities) in Yangtze River Delta, and we have prefectures in Japan as comparative regions for our analysis. Second, in this chapter we study tasks of development from viewpoints of wider frameworks like economic development theory, not from limited frameworks for respective areas. As asserted by Myrdal (1957) as the accumulated disequilibrium, in less developed economies immature situation of market economy has hindered trickle-down effects for its development. On the contrary, in developed economies backwash effects among regions as well as trickle-down effects work, when the latter effects contributed more than the former effects, it reduces the disparity between developed and less developed areas. Forming the regional economic area which could work such a mechanism is a hopeful way to diminish the disparity. As for China, for example, they get away from traditional system cutting off whole region at many places directed by administrative division towards more flexible regional economic areas. In China, we could not have measures to indicate “area” like commuting ratio, etc., in this chapter therefore we would not attempt to measure it but mainly examine conditions to form the “economic area.” As mentioned earlier, we would formulate hypotheses for conditions such as (1) establishing a market-oriented system based on

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reforming state-owned enterprises and (2) creating the growth center in the region with supporting area at its hinterland. We have a per capita GDP as a main measure of disparity among cities in Yangtze River Delta, and have the magnification meaning the ratio of maximum over minimum, and variation coefficient as being main indices to measure disparity in per capita GDP. Having a per capita GDP (or per capita GNP, per capita income, etc.) as a measure of disparity is a usual way because regional disparity indicated by GDP has significant effects on economic scale. On the other hand, regional disparity pointed out through per capita GDP could eliminate such sphere of scale. More information on what should be mentioned here on this chapter are as follows: (1) as described before we would analyze in this chapter the actual situation and its significant determinants of disparity in the Yangtze River Delta region in the 1980s and 1990s and also analyze changes of formation of regional economy and compare it. Considering in particular Yangtze River Delta region which satisfies the above-mentioned conditions for regional economy formation, we investigate empirically the layer structure of city functions concentrating on financial aspects. Moreover, (2) in order to make clear the characteristic policy tasks of economic development in Yangtze River Delta, we would compare it with economic development in post-war Japan. Through comparative analyses between various cities (municipalities) in Yangtze River Delta and 47 prefectures in Japan in terms of disparity, its determinants, regional layer structure, etc., we consider the contrasts and similarities between the two. Both examining the actual situation and its determinants on regional disparity, and investigating regional economy formation, we could recognize its relationships between them as shown in Figure 7.2. That is to say, actual situation of regional disparity might be a base to consider whether or not there could exist a center of regional economy which is a necessary condition to form regional economic area. On the other hand, the determinants of regional disparity might be a base to study whether or not there could exist a center of regional economy and to investigate the forming situation of a market-oriented system which is another condition for forming regional economic areas.

Insufficient

oriented economic system

regional disparity

A case study of Shanghai Initial attempt economic zone Conditions of forming regional

Center of

development

economic area

regional

None (1980s) economy Creation (1990s)

An analysis of layer structure of Yangtze River Delta cities

Supporting by hinterland

Figure 7.2

Conceptualization of relationships between regional disparity and regional economic development

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Explanation of disparity Actual situation

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2. Economic Development Strategy in the 1980s and Regional Disparity in the Yangtze River Delta 2.1. Actual situation of regional disparity in the Yangtze River Delta in the 1980s We could recognize the following characteristics on the Yangtze River Delta region in the 1980s after the coastal open door strategy. Table 7.1 describes the three characteristics: (1) with regard to the rank of per capita GDP of 1981 and 1990 (as for 1980 it was per capita total amount of agricultural and manufacturing production), Shanghai remained at the top, Zhejiang province raised to the sixth from eighth, Jiangsu province to seventh from fifth (of the first rank administrative area, except Beijing and Tianjin, provinces at the competitive position with Zhejiang and Jiangsu have been Guangdong Model region in South China). (2) The rank of per capita GDP growth rate of 1985–1990 shows Shanghai being 27th which points out unquestionable sinking in its economy, on the other hand Zhejiang province being tenth and Jiangsu province eleventh whose positions are much better than Shanghai. (3) Disparity of per capita GDP between Shanghai and, Zhejiang and Jiangsu provinces is remarkably reduced, as well as the ratio of maximum over minimum, and variation coefficient. In Yangtze River Delta in the 1980s, the disparity between Shanghai and regions around Shanghai shrinks which seems to be due to Shanghai’s unquestionable sinking.

2.2. An analysis of determinants on per capita GDP disparity in the Yangtze River Delta in the 1980s 2.2.1. A model Nakagane (1996b) indicates economic performance is determined by the three factors, which are (1) initial conditions (meaning natural geography, human geography, history, culture, economic level, capital situation, technological intensity, economic structure, etc.), (2) systemic and institutional factors (pointing out dominant form

1990

1995

Growth Rate Growth Rate (1985–1990) (1990–1998)

1998

Actual Rank Actual Rank Actual Rank Actual Rank Actual Rank

Growth Growth Rate Rank Rate Rank

752

—

856

—

1634

—

4835

—

6392

—

13.80

—

18.59

—

Shanghai

Developed area

2792

1

3855

1

5910

1

18943

1

28253

1

8.92

27

21.60

4

Jiangsu

“Jiangzhe Model” area

1121

5

1053

7

2103

7

7299

6

10021

7

14.84

10

21.55

5

855

8

1063

5

2122

6

8074

4

11247

4

14.83

11

23.18

3

548

17

741

17

1788

11

6965

7

10369

6

19.26

3

24.57

1

629 —

13 —

982 —

8 —

2395 1589

5 13

7973 5225

5 11

11143 6022

5 14

19.52 —

2 —

21.19 18.12

6 17

Zhejiang Fujian

“Guangdong Model” Guangdong area Hainan —

Source: Chinese Statistical Yearbook, annual; Chinese Wealth Power, 1997, 1998, etc. Note: Per capita agricultural and industrial total production in 1981.

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Area

1985

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Table 7.1 Per capita nominal GDP: Growth rate and rank (yuan)

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of corporate governance, economic mechanism, government type, etc.) and (3) policy factors (showing investment policy, fiscal policy, industrial policy, etc.). As a matter of fact, earlier literatures such as Watanabe (1995), Wu (1995a), Khan et al. (1993), Kato (1997) and Chen Yun (1998), etc., analyze regional disparity in China based on around the same factors as the above. We investigate therefore the factors significant for disparity among cities concerned here of respective year in the 1980s and 1990s, by estimating with multiple regression analysis on 14 cities in the Yangtze River Delta in narrow sense and 21 cities in the region in broad sense. The estimation was done with the following equation: Y = a + b1X1 + b2X2 + b3 X3 + b4X4 + b5X5 + b6X6 + b7X7.

(I)

Here Y indicates per capita GDP (yuan), and X1, X2, X3, X4, X5, X6 , X7 respectively point out the value of secondary or tertiary sectors (1,000 million yuan) occupied in GDP, local budget income (10,000 yuan), manufacturing production amount of non-state-owned enterprises (10,000 yuan), inward FDI (US$10,000), non-agricultural population (10,000 people), fixed investment (10,000 yuan) and heavy industry production amount (10,000 yuan). We have to limit independent variables to economic ones because of availability of statistics, although it is better to have other factors such as culture, education, geography to explain the disparity. The reasons for choosing the above independent variables are as follows: First, with regard to the value of secondary or tertiary sectors, it is said that since the 1980s the Petty and Clark Law has been held in China which means the richer provinces have less primary sectors, and more secondary and tertiary sectors. Since we could recognize multicollinearity, secondary or tertiary sectors are separately used as independent variables in the multiple regression analysis. Also, as it is difficult to distinguish which has more value added productivity in secondary or tertiary sectors, we have two kinds of estimation. Second, concerning the local budget income, for example, Wu (1995a) has researched to examine the effects of local budget income

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Economic Development and Regional Disparity of Yangtze River Delta 7.0

1.2

6.0

1.0

5.0

0.8

4.0

0.6

3.0

0.4

2.0

0.2

1.0 0.0

80

85

90

magnification (left)

Figure 7.3

261

93

95

97

98

0.0

variation coefficient (right)

Change of per capita GDP disparity (Shanghai, Jiangsu, Zhejiang)

Source: Shanghai Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual; etc.

on regional disparity. Her regression analysis brings dummy variables into equation on provinces which have different budget systems. In her estimation, Wu (1995a) allocates one for regions which receive financial support, regions of minority race and of trials in the reform and open door policy, and allocates zero for other regions, which reach better regression results than without the dummy. Hu and Wang (1995) also show similar results. Have financial institutions been significant for per capita GDP disparity in Yangtze River Delta in the 1980s? Table 7.2 displays the growth rate of budget income in several provinces and whole China. It shows that in Shanghai it was recorded minus 0.82 percent; on the other hand, Jiangsu province had an increase of 7.69 percent, and Zhejiang province 13.23 percent. Most advantageous provinces of Guangdong, Fujian and Hainan have growth rate of 12.93 percent, 14.64 percent and 17.1 percent respectively. The difference of growth rate in budget income, and the ratio of money paid to the central government to the budget income has a big difference between Shanghai and Guangdong whose respective ratios are 67 percent and 30 percent.1 1

Takai and Fujino (1996).

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Transition, Regional Development and Globalization Table 7.2 Growth rate of budget income Growth Rate Percent

Area China Shanghai Jiangsu Zhejiang Fujian Guangdong Hainan

National average Developed area “Jiangzhe Model” area “Guangdong Model” area

1952–1979

1979–1990

1990–1998

8.69 16.81 8.42 7.26 6.71 5.96 9.97

7.29 −0.82 7.69 13.23 14.64 12.93 17.11

12.29 11.64 10.22 8.71 16.07 21.95 20.87

Source: Chinese Statistical Yearbook, annual; Chinese Wealth Power, 1997, 1998, etc.

Needless to say, the above is not enough to have a reasonable conclusion insisting that financial institutions have significantly caused regional disparity. We therefore bring the local budget income into the multi-regression analysis. Third, as far as manufacturing production amount of non-stateowned enterprises and heavy industry production amount are concerned, the coastal reform and open door strategy in the 1980s started by selecting open areas such as Special Economic Zones and by implementing a household contract responsibility system and also by developing TVEs. Through gradual reforms, non-stateowned sectors like TVEs, private-owned enterprises, foreignowned enterprises have been rapidly growing, and on the contrary most of the state-owned enterprises are in deficit which are difficult to adjust to the market-oriented reform. Growth industries in the 1980s were labor-intensive, processing and light industries. The main reason for this is due to higher profitability for industries under the dual track system in China’s transition.2 Typical growing regions in China in the 1980s were in Guangdong and in Jiangzhe, in which the above growing sectors were remarkably shown.

2

Wu (1995a).

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263

The Guangdong Model is what is called FDI led type. Guangdong province occupied the highest position (22.8 percent) in the export share of whole China. On the other hand, Jiangzhe Model is TVEs led type. The ratio of non-state-owned production amount in Jiangsu province and in Zhejiang province in 1991 reached 70 percent, which was more than Guangdong province and Fujian province of the Guangdong Model as well as Shanghai. Through the 1980s reform and open door policy, disparity between provinces with more non-state-owned sectors like Guangdong, Jiangsu, Zhejiang and regions with more traditional state-owned sectors like Shanghai became so remarkable. As for the sector structure, each province of Guangdong, Jiangsu and Zhejiang has had higher ratio of light industries, and Shanghai has had higher ratio of heavy industries. From the viewpoint of industrial structure, the provinces of Guangdong, Jiangsu and Zhejiang have had more shares of non-state-owned sectors, and Shanghai less shares. Actually, share of light industries and non-state-owned sector in Shanghai in 1991 was 50.1 percent and 35.1 percent respectively, both of which were less than in each province of Guangdong, Jiangsu and Zhejiang.3 We recognize such differences led to regional disparities during the transition period toward a market-oriented economy.4 Fourth, regarding inward FDI and fixed investments, since the reform and open door policy in 1978 inward FDI in China has increased and taken significant effects on China’s economic growth. As was mentioned before Guangdong Model has been called an FDIled growth model. In the 1990s, regions which placed emphasis on China’s economic development have moved towards the Yangtze River Delta which caused important changes in investment structures. Until 1978, investment agency was unified in the central government, which has been pluralistic since the reform and open door policy for the central government, local governments, state-owned enterprises, collective enterprises, private investors, foreign investors, etc. The ratio of the central government investment to the construction investment of whole China occupied 80–90 percent before the reform 3 4

Chinese Statistical Yearbook 1991, China Encyclopedia 1991, Chinese Economic Bulletin 1991 See, for example, Hu and Wang (1995), Watanabe (1995) and Wu (1995b).

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and open door policy; however, after that it decreased year by year which was 37.5 percent in 1985, 20.8 percent in 1989 and 10.2 percent in 1992. In place of it, several investment sources such as bank loans, finance by issuing bond and stocks, expansion of foreign capital inflow.5 Meanwhile, it has been indicated about China’s investment policy that since the 1980s, more average income provinces have tended to gain from more fixed investment.6 Taking into consideration the above-mentioned situation, we bring inward FDI and fixed investment in the Yangtze River Delta into independent variables. Fifth, as far as non-agricultural population is concerned, because cities in the Yangtze River Delta have been the integrated administration of a large region implemented a system in which cities supervise prefecture, there have been rural areas within it. It means within the integrated administration of a large region, they have both urban areas (of cities) and rural areas (of counties and towns). Non-agricultural population therefore reflects urbanization level. In the earlier literatures on this subject, they analyze actual situation of disparity and its determinants paying their attention within urban areas, within rural areas, between urban areas and rural areas. In this chapter, we investigate with non-agricultural population, the significance of urbanization level to explain differences among integrated administrations of a large region. 2.2.2. Result of the analysis Table 7.3 indicates the results of multiple regression analysis. Since original units of independent variables are not the same, normalization of partial regression coefficient is necessary. With regard to the results of 1985 and 1990, manufacturing production amount of non-state-owned enterprises is recognized to be significant. In addition to it, as for 14 cities case, heavy industry production amount, local budget income, and fixed investments are significant. With regard to 21 cities case, besides the manufacturing production amount of 5 6

Chinese Statistical Yearbook 1993, p. 152. See, for example, Hu and Wang (1995) and Nakagane (1996a).

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Economic Development and Regional Disparity of Yangtze River Delta Table 7.3 1980s

265

Results of multi-regression analysis: The Yangtze River Delta in the

14 cities * Case R2 X1(secondary) (t-value) X1(tertiary) (t-value) X2 (t-value) X3 (t-value) X4 (t-value) X5 (t-value) X6 (t-value) X7 (t-value)

21 cities *

*

*

85

85

90

90

90

85

85

90

90

0.75

0.77

0.73

0.73

0.72

0.81

0.82

0.72

0.73

0.41 1.92

0.57 2.45 0.36 1.54

0.36 1.56

0.90 9.02

0.71 3.86

0.55 3.10 0.37 2.12

0.40 1.86

0.34 1.25 0.59 2.19

0.50 1.84

0.53 2.51 0.43 1.59

0.56 2.41

0.23 1.26

3.43 2.32

Notes : (1)* means the case in which heavy industry production amount is an independent variable. (2) Dependent variable of 1985 is per capita total amount of agricultural and manufacturing production, and independent variable is total manufacturing production. Source: Shanghai Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual; Chinese Cities and Counties Statistical Yearbook, annual; etc.

non-state-owned enterprises, heavy industry production amount and inward FDI are significant. We could recognize that in the Yangtze Delta in narrow sense factors such as local budget income and fixed investment meaning domestic investments and local policy are the significant ones; on the other hand, in the Yangtze Delta region in broad sense reform and open door policy factor like inward FDI is recognized to be significant. In 1985, the Yangtze Delta in narrow sense was appointed as the coastal open region, and seven national-level economic development

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zones which were the receiving areas of inward FDI, were intensively located at cities in the Yangtze Delta region in narrow sense. We would further examine such significant factors in economic development in the 1990s.

2.3. On the regional economy of the Yangtze River Delta in the 1980s: A case study of Shanghai Economic Zone As recognized before, in the 1980s Shanghai economy sank due to systemic factors such as state-owned sectors, and on the contrary both Jiangsu and Zhejiang provinces which are hinterlands for Shanghai enjoyed economic growth. What effects did those economic performances take in the Yangtze River Delta regional economy? We consider here the Shanghai Economic Zone case. Shanghai Economic Zone was launched in December 1982, and was proclaimed in April 1983, its area included the Yangtze Delta region in narrow sense. It included 10 cities and counties around them, which were Shanghai, Wuxi, Suzhou (in Jiangsu province), Hangzhou, and Ningbo (in Zhejiang province). In October 1984, it also expanded toward Anhui province as well as the above which include three provinces (Jiangsu, Zhejiang and Anhui) and one directly controlled municipality under central government (Shanghai). In December 1984, Jiangxi province was included, and in August 1986 Fujian province joined forming six provinces and one direct controlled municipality under central government (see Figure 7.4). The purpose of expansion of the Shanghai Economic Zone was to form a larger regional economic area by correcting the abuses of dividing smaller economic regions. It also indicates implementation of rational economic structures and industrial allocations by enlarging economic cooperation areas. However, the regional size which was enlarged at the beginning of the 1980s shrunk at the end of the 1980s. It meant that the Yangtze River Delta region could not form a regional economic area. What were the reasons behind it? First, we think that the main reason for this was the absence of a regional center which came from the economic sinking of Shanghai.

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Figure 7.4

267

The expansion of Shanghai Economic Zone

Note: Renmin Daily, 17 Dec 1983, 23 Aug 1986.

Although the Jiangzhe model region by which Shanghai was surrounded succeeded and income disparity among them shrank, in order to raise the whole region of the Yangtze River Delta and to form a regional economic area, it was indispensable to change the situation of the absence of regional center. Second, it could be due to systemic factors in the transition period. In the 1980s, for example, cities and counties which were in a lower rank in administration than provinces could not be independent in their policy decisions. Without the province’s agreement and support it was difficult enough to decide the formation of the Shanghai

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Economic Zone. To form a regional economic area, the following two steps were necessary: one was to create a regional center by reforming Shanghai (reforming state-owned enterprises, more advanced industrial structures, rebuilding the city, etc.), and the other was to move more market-oriented system in this region including reasonable allocation of finances and administration among the central government, provinces and lower rank authorities.

3. Economic Development and Regional Disparity in Yangtze River Delta in the 1990s 3.1. “T-shape development strategy” and Shanghai’s redevelopment In the 1990s, a new strategy entitled “all front open strategy” was being promoted. Its aim has been toward a balanced development of the whole nation. The priority area of the open region had shifted to Shanghai, based on which through the Yangtze River Delta toward Southwest inland regions had become the target for open and development policies. The details of it are as follows. In 1990, the Shanghai Pudong development plan was formerly decided, and in 1992 its development plan was also decided to be sped. Also in 1992, the opening policy of Seacoastal regions, Changjiangcoastal region and Borderland region strategy was submitted meaning, as well as other coastal regions, altogether 36 cities including five cities in Changjiang-coastal regions, 13 cities in Borderland regions (to develop border trade), and 18 inland cities and provinces were selected as strategic regions for development. The regional framework of the open policy in China was fundamentally established. What was closely related with economic development in the Yangtze River Delta and regional disparity was the “T-shape development strategy.” The policy goals of the “T-shape development strategy” were: (1) restoration of Shanghai economy and (2) reorganization of regional economy by expanding the restoration of the center toward the entire region of the Yangtze River Delta.

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269

We could interpret the policy measures based on Hirschman’s theory of unbalanced growth which asserts establishing the “growing points,” which is according to our way of thinking overlaps with the “growing poles” by Perroux. In the Yangtze River Delta in the 1990s, various kinds of development area were introduced as effective policy measures which based on our interpretation consistent with the Perroux’s theory of growing poles. There have been 26 national level development areas in 21 cities of the Yangtze River Delta (of which 24 development areas have been concentrated on the Yangtze Delta region in narrow sense). The ratio of the national level development areas occupied around 20 percent (of altogether 130 areas in China) of the 2.19 percent land area of the Yangtze River Delta to the whole of China. Except only seven, almost all of them were established in the 1990s.

3.2. Actual situation of regional disparity in Yangtze River Delta Per capita GDP disparity of the 1990s of the Yangtze River Delta region is recognized as follows. First, it is said that actual disparity of per capita GDP among cities in the Yangtze River Delta is as shown in Figure 7.5 that: (1) there was a peak period of 1992–1993, and a bottom period of 1995–1996. After 1996, disparity gradually increased to be about the same level as the beginning of the 1990s. (2) In a comparison of the disparities in 14 cities, with 21 cities in the Yangtze River Delta region, the disparity of 21 cities was more than 14 cities. It shows that 14 cities in which they have more per capita GDP than in 21 cities have been in the process of equalization. Second, as far as the actual disparity situation among Shanghai city, Jiangsu and Zhejiang provinces is concerned, it is understood as follows. As Table 7.1 on the change of national rank in per capita GDP displays, Shanghai has been constantly at the top position, and Jiangsu and Zhejiang provinces raised their positions to sixth (from the seventh) and fourth (from the sixth) respectively.

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0.8

8.0

0.6

6.0

0.4

4.0 0.2

2.0

0.0

0.0 85

90

91

92

magnification (left)

93

94

95

96

97

98

variation coefficient (right)

14 cities

21 cities

14 cities

21 cities

Figure 7.5 Disparity situation of per capita GDP among cities in the Yangtze River Delta

Also, Table 7.1 indicates the change of national rank in per capita GDP growth rate in the period of 1985–1990 and 1990–1998. It shows that Shanghai has gone up in rank remarkably (fourth from 27th), Jiangsu (fifth from 10th) and Zhejiang (third from 11th). Regarding the ratio of per capita GDP and variation coefficient, disparity among Shanghai, Jiangsu and Zhejiang provinces shrank in 1990–1995 and gradually expanded in 1996–1998.

3.3. On the analysis of determinants of per capita GDP disparity among cities in the Yangtze River Delta in the 1990s As economic development in the Yangtze River Delta in the 1990s was understood to have restarted from the 1980s, we analyze here with fundamentally the same equation as indicated as (I). Establishing development areas which reflected the degree of openness placed great stress on the Yangtze River Delta in the 1990s.

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271

Dummy variables are brought into the equation in order to examine the policy effects, whose detail is to allocate one to the cities being established as the national level development area (meaning Shanghai, Nanjing, Wuxi, Changzhou, Suzhou, Nantong, Lianyungang, Hangzhou, Ningbo, Wenzhou) and allocate zero to others, which leads to the equation (II): Y = a + b1X1 + b2X2 + b3 X3 + b4X4 + b5X5 + b6X6 + b7X7 + rD 8.

(II)

Here D 8 means dummy.

3.4. Investigating the determinants of disparity The analytical results are shown in Table 7.4 (14 cities case) and Table 7.5 (21 cities case). Interpretation according to our way of thinking will be as follows. First, in both cases of 14 cities and 21 cities, manufacturing production amount of non-state-owned enterprises is understood as significant. Reform tendency in the 1990s related with non-state-owned sectors is explained here. With regard to the All Open Front Strategy in the 1990s, not only expanding the area of open regions but also the role of experiment toward a market-oriented system was strengthened further. Important measures in this period focused on promoting competition like more market-oriented production factors, equalization of opportunities, etc., and on establishing a market friendly environment. On 1 January 1994, the central government announced a series of important reform measures in terms of finance, foreign capital, enterprise related institution, etc. Together with the above, state-owned enterprises related reforms like securitization were gradually recognized. However, at the beginning of the 1990s, the central government overwhelmingly controlled the stocks of state-owned enterprises and did not allow their distribution and transfer, which meant it was extremely difficult to cancel the soft budget system of the central government. Stateowned enterprises reform was scheduled in the “Three Important

90

90

91

92

92

94

95

96

97

98

98

0.73

0.73

0.72

0.83

0.74

0.75

0.66

0.64

0.77

0.74

0.997

0.995 0.070 3.250

0.36 1.56

0.64 3.23

0.60 2.85

0.83 5.07

0.81 4.86

0.89 6.71

0.87 6.19

0.050 7.810

0.030 2.300

0.020 1.320

0.020 1.320 0.030 1.840

0.92 7.98

0.53 2.51

0.31 1.55 0.56 2.41

Note: * means the result of heavy industry production as independent variable. Source: Shanghai Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual; Chinese Cities and Counties Yearbook, annual; etc.

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0.41 1.92

0.57 2.45 0.36 1.54

0.090 5.480

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0.02 1.68

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R2 X1 (secondary) (t-value) X1(tertiary) (t-value) X2 (t-value) X3 (t-value) X4 (t-value) X5 (t-value) X6 (t-value) X7 (t-value)

90

Transition, Regional Development and Globalization

*

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Table 7.4 Results: The case of 14 cities in the 1990s

*

**

**

**

92

92

92

92

94

94

95

96

96

97

98

98

0.72

0.73

0.76

0.72

0.73 0.30 1.31

0.73

0.73 0.29 1.28

0.70

0.69

0.64

0.72

0.71

0.71

0.72

0.71

0.55 2.31

0.85 6.95

0.73 5.48

0.81 6.05

0.86 7.32

0.84 5.83

0.85 7.09

0.86 7.30

0.81 5.74

0.22 1.24

0.55 3.10 0.37 2.12

0.40 1.86

0.86 7.29

0.60 2.66

0.69 3.80

0.88 7.94

0.50 2.32 0.11 0.83

0.13 0.46

0.09 0.22

0.31 0.64

273

Notes : (1) * means the result of heavy industry production as independent variables. (2) ** means the case with dummy variables. They are not significant. Source: Shanghai Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual; Chinese Cities and Counties Yearbook, annual; etc.

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90

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90

Economic Development and Regional Disparity of Yangtze River Delta

R2 X1(secondary) (t-value) X1(tertiary) (t-value) X2 (t-value) X3 (t-value) X4 (t-value) X5 (t-value) X6 (t-value) X7 (t-value) D8 (t-value)

**

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Table 7.5 Results: The case of 21 cities in the 1990s

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Reforms” (which displayed the reform of state-owned enterprises, financial markets, administration) by the then prime minister Zhu Rongji, and had new developments. In 1998, the stocks held by the central government were converted to institutional stocks which were listed, and when the Constitution was amended in March 1999, the legal position of non-state-owned sectors had been formerly established. In the case of 14 cities in 1998, the reason why normalized partial regression coefficient on the non-state-owned sector displayed remarkable decrease arose from the significance of factors such as on industrial structure as secondary and tertiary sectors. Undoubtedly, it remained unchanged in the 1990s for non-state-owned sectors to be the most important cause of disparity, which emphasized without reforming state-owned enterprises that regional disparity would never have disappeared. Second, inward FDI was significant both in the case of the 14 cities and 21 cities for disparity at the beginning of the 1990s. Reasons behind it seemed to be (1) the development boom caused by the Shanghai Pudong area development and Deng Xiaoping’s Southern Journey had given regions in the Yangtze River Delta equal opportunities to invite inward FDI, and (2) the inward FDI slump since 1996 arising from the Asian financial crisis equally took place in the Yangtze River Delta, (3) the inward FDI factor was partially offset by non-state-owned sectors. Third, as we cannot have enough statistics on heavy industry production amount (we only have the statistics for 1985, 1990 and 1994), it is difficult to fully recognize the significance. With regard to the analytical result, both cases of 14 cities and 21 cities, it was significant in 1985 and 1990. Fourth, in order to understand the policy effects on national level development areas, we brought dummy variables as mentioned earlier into the equation. Table 7.5 indicates the result which shows that none of them (years of 1992, 1994, 1996, 1998) were significant. In the Yangtze River Delta region, factors related to policy effects like establishing development areas seemed to be less significant than systemic factors like non-state-owned sector related ones. Why were

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factors related with policy effect not significant? We think reasons behind it are the following three. (1) Although the establishment of national level development zones placed great importance on inviting non-state-owned sectors like foreign capital, general economic performance was more closely related with traditional characteristics. In Shanghai in the 1980s, for example, the central government appointed Shanghai as one of the 14 coastal open cities and also established three national level development zones within it, even when other open cities had only one development zone. However, in Shanghai in the 1980s, where a production base was built for heavy industry by state-owned enterprises, they could not utilize such political advantageous position as was recognized the failure of Shanghai Economic Zone. (2) The national level development zones were usually established outside the old built-up area, where land area was a part of a municipality’s administration area. Establishment of development zones therefore did not straightforwardly lead to a change of entire cities (municipalities). Particularly in the cities (municipalities) where state-owned sector oriented economy was firmly established, it seemed to need a much longer term to have significant effects. (3) Since a Deng Xiaoping’s Southern Journey at the end of 1992, development boom took place all over China. However, on the other hand, after 1993 the total growth rate of China became lower, based on which we cannot infer any significant relations between the establishment of development zones and economic growth.

3.5. A comparison between Yangtze Delta regions in broad sense and in narrow sense By comparing of Tables 7.4 and 7.5, we recognize the discrepancies between Yangtze Delta regions in broad sense and in narrow sense, which are the following three. First, as of 1998, non-farming population was a significant factor of the disparity among 14 cities; however, not significant among

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21 cities. It can be interpreted as in the Yangtze Delta region in narrow sense which had rapid urbanization. We recognize also that in 1998, both secondary and tertiary sectors were significant. The main reason for the rapid urbanization seemed to be expansion of TVEs. It is usually argued that as for the effects related to growth centers, backwash effects are further reaching than the trickle-down effects.7 We think that the Yangtze Delta regions in narrow sense (Shanghai and its surroundings), which has been strongly supported by the central government to become a national center of international finance, trade and economy, has first of all taken trickle-down effects. Second, significance of fixed asset investment was recognized for 14 cities in 1990, 1992 and 1998, but not completely for the 21 cities, which can be understood that fixed asset investment was progressing toward the outskirts of Shanghai. The significance of fixed asset investment at the beginning of the 1990s might be caused by investment boom originally from Deng Xiaoping’s Southern Journey at the end of 1992. During this period, with active support from various local governments, enterprises suffered from overcapacity of production, which was pointed out as a reason of decreased GDP growth rate after 1993 in China. Meanwhile, it can be interpreted that the significance of fixed asset investment in 1998 was coming from fiscal policy after the Asian crisis. In order to increase domestic demand, the central government took several measures such as promotion of industry, infrastructure construction, and house building. Needless to say, it was not easy because of the budget problem. The ratio of government income to GDP in China as of 1998 was around 12 percent (which was lower than in Japan at 20 percent). Third, the significance of local budget revenue was found for 14 cities in 1985 and 1990, but not for 21 cities, which might mean that at the beginning of the 1990s local budget revenue was rather equalized outside the Yangtze River Delta. We think that there were

7

See, for example, Inamura et al. (1999).

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reasons behind the significance of local budget revenue in the 1980s and the beginning of the 1990s, which came from the tax reform meaning of the tax sharing system after 1994. It indicated a new taxation system to clearly divide the tax into local tax, national tax and common tax, each of which had its own authority to impose a tax. The new taxation system was meant to stop the tax revenue reduction since the 1980s and to establish a tax revenue increasing mechanism. Also, the purpose of new taxation system was to equalize tax burden which had been fairly different among local governments. However, as collecting tax job is entrusted to local taxation offices, local tax had a priority to be imposed which caused the problem of national tax collection.

4. Layer Structure of City Function on 21 Cities in the Yangtze River Delta 4.1. Conditions of forming urban economic area in the Yangtze River Delta in the 1990s We recognize the restoration of Shanghai economy by consideration of disparity situation in the Yangtze River Delta in the 1990s. We can also insist that the Yangtze Delta region in narrow sense has become a regional economic area. It is supported by the following evidence: (1) their ranks of per capita GDP and the growth rate of Shanghai, Jiangsu and Zhejiang provinces in the whole China have gone up; (2) disparities among Shanghai, cities in Jiangsu and Zhejiang provinces and cities around the provinces have shrunk during 1990–1995; and (3) Yangtze Delta region in narrow sense particularly in which per capita GDP level is high and its disparity is decreased seems to have its own mechanism. The conditions to become a regional economic area are: (1) creation of a regional growth center by restoring Shanghai’s economy and the advancement of industrial structure, (2) support by the Jiangzhe model region which was the growing region in the 1980s, and (3) establishment toward a market-oriented system as full scale reform of state-owned enterprises.

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We examine more about the above (1) and (2). As far as policy measures for advancement of city function in Shanghai are concerned, in Shanghai which has moved toward a national center of international finance, trade and economy, various development zones have been established starting with the Pudong development. Through advancement of city functions, in the built-up area, both Waitan band financial street and Lujiazui financial and trade zone across Huangpu River, have been developing to be new central business district (CBD) in Shanghai. Also in the suburban areas, high-tech industrial development zones, emerging industrial zones, and private management zones were established, and in the suburban county urban type modern agricultural development zones were founded. Moreover, through rebuilding large-scale economic cooperation zones, cooperation between Shanghai and other areas in the Yangtze River Delta region as well as Yongtze Valley has been progressing.8 Table 7.6 shows industrial structure of Shanghai, Jiangsu and Zhejiang in the 1990s, which supports the argument that Shanghai GDP growth in the 1990s was aided by the tertiary sector’s expansion. Additionally, the breakdown of tertiary sectors in Shanghai points out that transportation, telecommunications, wholesale and retailing, restaurant, finance and insurance were the main ones through the 1990s. In particular, finance and insurance kept growth rates rather high in the period concerned. Advancement of city function has made Shanghai play central roles of the Yangtze River Delta urban economic area. On the other hand, both Jiangsu and Zhejiang provinces had about the same growth rate of tertiary sectors during 1990–1995; however, in 1995–1998 their growth rates were much lower than Shanghai’s for each tertiary sector. As far as the secondary sector was concerned, through the 1990s each province of Jiangsu and Zhejiang recorded more growth rates than Shanghai. It seemed to point that two provinces and one direct controlled municipality under central government in the 1990s had division of function in their

8

Chen, Yun (1998).

Shanghai

Jiangsu

Zhejiang

14.41

22.54

29.48

11.78

23.90

31.45

12.27

13.60

8.37

14.04

19.02

6.20

13.76

19.99

4.09

Secondary sector Manufacturing Construction

18.27 17.71 24.03

23.91 23.79 25.37

9.42 8.23 21.83

23.05 22.22 30.20

31.42 31.23 33.49

10.26 8.57 24.89

26.69 26.90 24.93

35.06 35.02 35.38

13.88 14.42 9.27

Tertiary sector Transporatation and telecommunication Wholesale and retailing Finance and insurance Real estate Social services Health and social welfare Education, liberal arts, etc. Science research, technology services, etc. National institutions, social associations, etc.

28.23 18.60

32.66 22.14

21.16 12.92

27.30 27.19

33.98 31.84

16.91 19.79

25.68 27.42

33.68 35.37

13.38 15.20

29.58 28.00 62.84 34.71 28.07 27.68 23.90

39.05 28.13 89.36 41.18 31.77 28.61 25.99

15.20 27.79 26.64 24.57 22.14 26.15 20.49

27.58 23.07 34.34 34.30 25.51 25.30 26.71

38.01 30.12 39.67 38.95 30.52 28.95 33.77

11.93 12.17 25.91 26.89 17.60 19.46 15.77

28.09 18.46 21.85 31.02 28.89 22.55 15.89

38.81 25.72 26.64 38.53 34.91 26.16 15.58

12.04 7.28 14.28 19.39 19.45 16.77 16.41

25.45

25.83

24.81

23.46

26.31

18.86

23.49

28.09

16.17

Per capita GDP

21.59

26.23

14.24

21.55

28.26

11.14

23.18

30.64

11.68

Economic Development and Regional Disparity of Yangtze River Delta

Source: Shanghai Economic Yearbook, annual; Shanghai Statistical Yearbook, annual; Jiangsu Statistical Yearbook, annual; Zhejiang Statistical Yearbook, annual; etc.

279

90–98

90–95

95–98

90–98

90–95

95–98

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90–98

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Table 7.6 GDP growth rate of each sector: Shanghai, Jiangsu, Zhejiang (percent)

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industrial structures, which needless to say predicts the unified function as an economic area of the Yangtze River Delta region.

4.2. On the central supervising functions and layer structure The background research on the central supervising functions which became very popular in Japan, was based on the fact which showed that high-speed economic growth in the 1950s and 1960s promoted the increase of population, and industries in urban areas. Undoubtedly, we classify the central supervising functions of city into economic functions, administration functions, and cultural and social functions. Its economic functions can be classified more as financial and insurance, wholesale and office support. Since the reform and open door policy in the 1980s, China recorded a two-digit economic growth rate, and even after the Asian crisis of 1996, its growth rate reached eight percent. It can be observed that the industries and population were concentrated in coastal regions and city area. Regional reorganization has been progressing in the wave of market-oriented movement, in which regional economic centers have been growing, city functions have been differentiating and city central supervising functions have been increasing. Here in this chapter, we pay attention to economic functions, particularly finance and insurance functions to be analyzed, because according to our way of thinking, financial functions in the regional economy has been crucial under the contemporary international economy. State-owned banks in China were established along with administrative organizations which hindered forming their own reasonable institution to develop their business. The financial organization should be understood as what is called the centrally-planned system. Since the 1980s, commercial banks were newly established. Those banks are stock companies, and under the central government’s supervision they were independently managing, taking risks of their own, and competing with each other. Branch locations are independently decided, keeping up with the needs of the region. In this

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chapter thus, based on tendencies of regional economies, we investigate commercial banks which independently establish branches and develop their business. In the 1995, the Law on the Peoples Bank of China was approved which indicated the Chinese people’s bank as a central bank and four state-owned banks to be commercial banks.

4.3. Layer structure of the Yangtze River Delta cities 4.3.1. On the branch location of commercial banks Of a total of 14 commercial banks established until 1996, two banks have their headquarters in Shanghai, which are Shanghai Transportation Bank (a nationwide commercial bank) and Shanghai Pudong Development Bank (regional commercial bank). The share occupied by the above two banks to the 14 banks in 1996 showed that, with regard to total assets, deposits and loans, each bank reached around 50 percent and as far as profit before tax was concerned, it was 82.27 percent. According to Shanghai Pudong Development Bank branch location network, except three branches in Beijing, Chongqing, Guangzhou, the other four branches in Nanjing, Hangzhou, Ningbo, Suzhou are located in the Yangtze Delta region in narrow sense and their supervised branches covered 14 cities of the Delta region in narrow sense. In terms of their business operations, the number of branches handling both Chinese yuan and foreign currencies are in the order of Nanjing, Hangzhou, Ningbo, Suzhou, as well as Shanghai.

4.3.2. On the general financial index Table 7.7 was prepared based on data from the 1967 National Land Planning Association (Japan), which indicates that the first general financial index was prepared by (1) the number of offices of financial institutions, (2) bank deposit balances of states,

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Beijing branch Shanghai head office

Other region Beijing 8 offices

Chongqing branch Yangtze River Delta region Guangzhou branch

Nanjing branch

Hangzhou branch

Ningbo branch

Wenzhou 1 office

Ningbo 2 offices

Ningbo 6 offices

Jiaxin 1 office

Shaoxing 1 office

Hangzhou 7 offices

Hangzhou 3 offices

Suzhou 2 offices

Nantong 1 office

Wuxi 2 offices

Nanjing 9 offices

Figure 7.6

Suzhou branch

Domestic branch location of Shanghai Pudong Development Bank

Source: Shanghai Pudong Development Bank homepage. Note: • means business on Chinese yuan (deposits, loans, settlements, savings, etc.) and business which the Chinese Central Bank gives permission.
indicates business on foreign currency (deposits, loans, remittances, exchanges, etc.) and business which the Chinese Central Bank gives permission.

(3) premiums on insurance contracts, upon which both financial functions and the rank of about 21 cities of Yangtze River Delta are shown. As it indicates, financial function of Shanghai occupied 26.42 percent of whole region which was followed by Nanjing, Hangzhou, Ningbo, and Suzhou. We recognize the consistency between city layer structure shown by general financial index and city layer structure indicated by branch allocation of Shanghai Pudong Development Bank.

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Table 7.7 Financial function and the rank: 21 cities of the Yangtze River Delta (whole area = 100) Shares (1995) Area Shanghai Nanjing Hangzhou Ningbo Suzhou Wuxi Yangzhou Changzhou Nantong Wenzhou Xuzhou Jiaxin Huaiyin Shaoxing Yancheng Jinhua Zhenjiang Lianyungang Quzhou Zhoushan Huzhou

General Index

A

B

C

9.34 7.72 5.97 5.58 6.95 5.19 7.52 4.31 6.32 4.37 4.63 3.22 5.86 3.98 4.63 3.71 3.59 2.56 1.92 1.54 1.09

40.84 8.19 7.79 3.91 6.39 4.22 3.47 2.51 3.29 2.72 2.59 1.84 1.52 2.00 2.03 1.61 1.63 1.13 0.71 0.56 1.04

29.08 10.61 9.01 12.18 3.96 5.19 2.13 4.99 2.09 3.38 1.75 3.28 0.82 2.16 0.97 2.16 1.45 0.95 1.41 1.33 1.11

(A + B + C)/3 26.42 8.84 7.59 7.22 5.77 4.87 4.37 3.94 3.90 3.49 2.99 2.78 2.73 2.71 2.54 2.50 2.23 1.55 1.34 1.14 1.08

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Note: A, B, and C indicate number of office of financial institutions, bank deposit balances of the state (100 million yuan), and premium on insurance contracts (100 million yuan) respectively. Source: Chinese Wealth Power, 1997.

5. Comparative Analysis with 47 Prefectures in Japan 5.1. Explanation about the comparison Here in this chapter, we comparatively analyze cities (municipalities) of the Yangtze River Delta with 47 prefectures in Japan. The following similarities can be pointed out about the above two. (1) On the total area and total population: the Yangtze Delta region in broad sense equals to around two-thirds of Japan’s area, its total population was about the same as in Japan. (2) On regional

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average area and average population: the average area of Japan’s prefectures is slightly smaller than of cities (municipalities) in the Yangtze River Delta, which is 8,000 square kilometers and 10,000 square kilometers respectively, and the average population of cities (municipalities) of the Yangtze River Delta is more than double the average population of Japan’s prefectures. (3) On the nature of regions: China’s cities (municipalities) have implemented the system in which several counties are supervised by a municipality. As shown in Figure 7.7, a municipality generally includes several counties (whose main is farming area) as well as built-up areas. We therefore understand that municipalities of the Yangtze River Delta are more similar to prefectures in Japan, which include many more cities, towns and villages than Japanese cities.

A system where municipality supervises counties (municipality)

District under municipality (built-up area)

County level city District under county level city

Sub-district office (Jiedao)

Figure 7.7 counties

Town (Zhen)

Township (Xiang)

Subdistrict office (Jiedao)

Town (Zhen)

Township (Xiang)

County District under county

Subdistrict office (Jiedao)

Town (Zhen)

Township (Xiang)

City structure in China: A system where municipality supervises

Notes : (1) Municipalities in this system are roughly classified into two groups: “municipalities directly under the central government” and “municipalities directly under the control of province.” (2) Parts of dotted line are not administrative institutions, but agencies of upper administrative institutions. Source: Authors.

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5.2. Actual situation of regional disparity in Japan’s prefectures Per capita GDP disparity in 47 prefectures in Japan points out two peak periods of 1960–1970 and of 1990, which we recognize were due to (1) high-speed economic growth and (2) what is called the bubble economy (see Figure 7.8).

5.3. On the significant factors of regional disparity in Japan’s prefectures We also investigate here the significant factors of regional disparity in Japan’s 47 prefectures with multiple regression analysis and the same equation of (I). Independent variables to be examined are almost the same as before except for non-state-owned sectors which is replaced by the government service sector. The reasons for it are as follows. Many earlier literatures indicate, since the reform and open door policy, non-state-owned sectors have been a driving force of China’s economic growth, due to which we choose the non-state-owned 4.0

0.30

3.5

0.25

3.0

0.20

2.5

0.15

2.0 1.5

0.10

1.0

0.05

0.5 0.0

0.00 55 60 65 70 75 80 85 90 95 97

magnification (left)

variation coefficient (right)

Figure 7.8 Japan

Disparity situation of per capita GDP among 47 prefectures in

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industries as independent variables. Also as mentioned previously, the Yangtze River Delta region has not only traditionally state-owned centered regions like Shanghai, but also non-state-owned centered regions such as Jiangsu province and Zhejiang province. We think it is reasonable for our research to bring non-state-owned sectors as an independent variable. However, in the statistics of whole China’s economy we cannot have non-state-owned sectors, therefore we choose non-state-owned industries as a proxy variable. As for Japan, in order to have significant independent variables to explain economic growth, as was mentioned, because per capita GDP disparity in Japan has been rather small, increased population could be significantly related to economic growth, which leads us finally to bring the government service sector in as an independent variable. Independent variables to test the significance of regional disparity in Japan are the following seven: X1: secondary or tertiary sectors (1,000 million yen), X2: local budget income (1,000 million yen), X3: government service (1,000 million yen), X4: foreign enterprises production amount (1995 year data, million yen), X5: agriculture and forestry sector employees (thousand), X6: total fixed capital formation (billion yen), X7: ratio of heavy chemical industries (percent). As before, because original units of independent variables are not the same, normalization of partial regression coefficient is necessary. Table 7.8 points out the result, which indicates the two significant factors are secondary or tertiary sectors and the ratio of heavy chemical industry. Undoubtedly, these two factors are related to initial conditions (which means economic structure).9 What should be pointed out here about Japan’s heavy chemical industry is that it radically changed its industrial structure since the 1950s, which showed the transformation from material-oriented toward consumption-oriented, with the line of knowledge-intensive industry. 9

Nakagane (1996a).

65

70

75

75

80

80

85

85

90

90

95

95

95

95

0.717 0.689 0.714 0.694 0.706 0.708 0.726 0.735 0.800 0.680 0.733 0.784 0.763 0.70 0.68 0.70 0.71 0.69 0.37 7.85 7.61 8.20 8.57 7.72 3.64 0.75 0.70 0.68 0.70 0.74 0.71 0.41 9.01 8.43 3.75 8.64 10.57 8.96 2.88

0.24 2.68

0.30 3.60

0.27 2.99

0.32 3.75

0.29 3.38

0.33 4.11

0.28 3.43

0.33 4.69

0.28 3.15

0.33 4.17

0.37 2.55

0.23 3.16

0.29 3.77

Notes : (1) * means the result of foreign enterprises production amount as independent variable. (2) With regard to government service, in 1965 and 1970, it meant public service and was included in tertiary sectors. Source: Chiiki Keizai Souran (Databook on Regional Economies), Toyo Keizai, annual; Nihon Toukei Nenkan (Japanese Statistical Yearbook), Soumusho, annual; Kenmin Keizaikeisan Nenpou (Annual Report on Economic Account of Prefectures), Keizai Kikaku Chou, annual; etc.

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0.24 2.95

0.47 4.70

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R2 0.832 0.754 0.808 X1 (secondary) 0.86 0.83 (t-value) 13.01 11.81 X2 (tertiary) 0.79 (t-value) 10.11 X2 (t-value) X3 (t-value) X4 (t-value) X5 (t-value) X6 (t-value) X7 0.12 0.19 0.18 (t-value) 1.76 2.43 2.54

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*

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Table 7.8 Results: 47 prefectures in Japan

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5.4. An analysis of regional layer structure on 47 prefectures in Japan First, we pay our attention on the branch allocation of the (then) Daiichi Kangyo Bank (which has been incorporated to be Mizuho Bank). Table 7.9 shows regional composition ratio of the branch number of Daiichi Kangyo Bank which is indicated in time series. We recognize in it the following characteristics: (1) first, regional composition ratio in Tokyo increased to 43.1 percent in 1995 (from 40.38 percent in 1977), and after then slightly decreased. Other Kanto regions, particularly several areas in the Tokyo region, on the whole increased. (2) Osaka dropped in the rank to be the third since 1977 and constantly decreased in its ratio. Several other areas in Kansai region generally indicated a decreasing tendency. (3) The number of regions which had only one branch was almost without change; however, its ratio was lowered to 0.28 percent (from 0.32 percent). It could be expected that concentration of regional composition would increase. Second, with regard to time series change of layer structure shown by general financial index, Table 7.10 displays the same process as Table 7.7, time series change of the rank of general financial index which is prepared by the three of number of financial institutions, bank deposit balances and premiums on insurance contracts. We have results which show (1) Tokyo as the first layer, (in order of rank) Osaka, Kanagawa and Aichi as the second layer, and (in order of rank) Saitama, Hyogo, Chiba, Fukuoka, Hokkaido, Shizuoka and Hiroshima as the third layer, also (2) better performance by Kanagawa, Saitama, Chiba (of Tokyo region), and the fall of Aichi, Hyogo, Kyoto, etc. (of Kansai region) whose changes and characteristics are consistent with layers pointed out by the nationwide bank.

5.5. A comparative analysis on regional disparity of China with Japan The following characteristics could be indicated on regional disparity from comparative viewpoints of China with Japan.

77 Share

Share

Share

Tokyo 40.18 Kanagawa 12.02 Osaka 9.38 Chiba 6.16 Saitama 4.99 Aichi 3.52 Hyogo 2.93 Kyoto 2.05 Tochigi 1.47 Gunma 1.17 Shizuoka 1.17 Fukuoka 1.17 Ibaragi 0.88 Mie 0.88 Yamaguchi 0.88 Hiroshima 0.59 Ehime 0.59 Nagano 0.59 Hokkaido 0.59 Nara 0.59 Aomori 0.59 …

Share

Tokyo 43.10 Kanagawa 11.27 Osaka 9.01 Chiba 5.63 Saitama 5.35 Aichi 3.38 Hyogo 2.82 Kyoto 1.69 Tochigi 1.41 Gunma 1.13 Shizuoka 1.13 Fukuoka 1.13 Ibaragi 0.85 Mie 0.85 Yamaguchi 0.85 Hiroshima 0.56 Ehime 0.56 Nagano 0.56 Hokkaido 0.56 Nara 0.56 Akita 0.28 …

Rank

Share

Tokyo 41.94 Kanagawa 11.14 Osaka 9.38 Chiba 5.87 Saitama 5.57 Aichi 3.52 Hyogo 2.93 Kyoto 1.47 Tochigi 1.17 Gunma 1.17 Shizuoka 1.17 Fukuoka 1.17 Ibaragi 0.88 Mie 0.88 Yamaguchi 0.88 Hiroshima 0.59 Ehime 0.59 Nagano 0.59 Hokkaido 0.59 Nara 0.59 Aomori 0.29 …

Rank Tokyo Kanagawa Osaka Chiba Saitama Aichi Hyogo Kyoto Tochigi Gunma Shizuoka Fukuoka Ibaragi Mie Yamaguchi Hiroshima Ehime Nagano Hokkaido Nara Aomori

289

Note: Regions which have only one branch are omitted. Source: Nihon Kinyu Meikan (Japanese Financial directory), annual.

Rank

98

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Tokyo 40.42 Kanagawa 11.38 Osaka 9.58 Saitama 5.99 Chiba 5.09 Aichi 3.89 Hyogo 2.69 Kyoto 2.10 Tochigi 1.50 Gunma 1.20 Shizuoka 1.20 Fukuoka 1.20 Ibaragi 0.90 Mie 0.90 Yamaguchi 0.90 Hiroshima 0.60 Ehime 0.60 Nagano 0.60 Hokkaido 0.60 Nara 0.60 Aomori 0.30 …

Rank

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Tokyo 39.24 Osaka 10.44 Kanagawa 10.13 Saitama 5.38 Chiba 5.38 Aichi 4.43 Hyogo 3.16 Kyoto 2.22 Tochigi 1.58 Fukuoka 1.27 Gunma 1.27 Shizuoka 1.27 Ibaragi 0.95 Mie 0.95 Yamaguchi 0.95 Hiroshima 0.63 Ehime 0.63 Nagano 0.63 Hokkaido 0.63 Nara 0.63 Aomori 0.32 …

Rank

88

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40.38 10.26 9.29 5.13 5.13 4.49 3.21 2.24 1.60 1.28 1.28 1.28 0.96 0.96 0.96 0.64 0.64 0.64 0.64 0.64 0.32 …

Rank

85

Economic Development and Regional Disparity of Yangtze River Delta

Share

80

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Table 7.9 Regional structure and rank of branch number of Daiichi Kangyo Bank (share; percent)

70

80

90

98

Share

Area

Share

Area

Share

Area

Share

Area

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

28.21 13.31 5.99 4.10 3.99 3.87 3.04 2.54 2.42 2.00 2.00 1.47 1.41 1.23 1.15 1.14 1.13 1.12 1.11 1.07

Tokyo Osaka Aichi Kanagawa Hyogo Hokkaido Fukuoka Shizuoka Kyoto Saitama Hiroshima Chiba Niigata Yamaguchi Miyagi Gunma Gifu Mie Okayama Ibaragi

27.12 14.34 6.48 6.45 4.52 3.19 2.92 2.85 2.57 2.47 2.22 1.82 1.28 1.18 1.17 1.10 1.09 1.05 1.04 0.99

Tokyo Osaka Kanagawa Aichi Hyogo Hokkaido Shizuoka Saitama Fukuoka Kyoto Chiba Hiroshima Niigata Okayama Mie Ibaragi Gifu Gunma Nagano Yamaguchi

21.62 10.67 5.20 4.80 3.57 3.47 3.38 3.09 3.00 2.84 2.10 1.96 1.72 1.56 1.43 1.31 1.25 1.25 1.25 1.24

Tokyo Osaka Kanagawa Aichi Hyogo Saitama Hokkaido Chiba Fukuoka Shizuoka Kyoto Hiroshima Niigata Ibaragi Miyagi Okayama Mie Gunma Gifu Nagano

20.65 9.67 5.37 4.91 3.72 3.62 3.56 3.50 3.14 2.55 2.11 1.96 1.89 1.72 1.69 1.57 1.36 1.35 1.32 1.29

Tokyo Osaka Aichi Kanagawa Hyogo Fukuoka Saitama Chiba Hokkaido Shizuoka Hiroshima Nagano Kyoto Ibaragi Niigata Miyagi Mie Gifu Tochigi Gunma

15.37 6.87 5.39 5.16 4.05 3.79 3.78 3.77 3.21 2.71 2.20 1.97 1.84 1.82 1.68 1.53 1.49 1.48 1.44 1.43

Tokyo Osaka Kanagawa Aichi Saitama Fukuoka Hyogo Chiba Hokkaido Shizuoka Hiroshima Ibaragi Niigata Kyoto Miyagi Mie Tochigi Gifu Fukushima Nagano

Notes : (1) The share for the general index means the average of the three, number of financial institutions, bank deposit balances and premiums on insurance contracts. (2) Insurance indicates life insurance and fire insurance. (3) In 1965 without fire insurance and, in 1965 and 1970 without number of financial institutions. Source: Chiiki Keizai Souran (Databook on Regional Economies), annual.

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First, per capita GDP disparity among cities in the Yangtze River Delta shows around double of Japan’s disparity which undoubtedly seems to be related with characteristics of significant factors. Also, the doubling of disparity might be related to layer structures in the regions concerned here. Second, with regard to significant factors on disparity, it is said that, in Japan, we recognize two significances: secondary or tertiary sectors, and the ratio of heavy chemical industry. On the other hand, in China (in the Yangtze River Delta), significance of industrial structure shown by secondary or tertiary sectors was not confirmed except in 1998. Also, the heavy industry lost its significance in 1994 (though it had in 1985 and 1990). Meanwhile, both systemic factors such as non-state-owned sectors and policy factors like the local budget system are closely connected with China’s economic system display remarkable significance. However, the establishment of national level development zones which might be free from systemic implications was not recognized to be significant. Third, as far as regional layer structure of financial function was concerned, the following two were confirmed. First, the number of branches of a nationwide bank in Japan was much more than of commercial banks in the Yangtze River Delta, which suggests, we think higher of penetration of Japan’s financial institutions into the region and around it. Second, both Japan’s layer structure led by Tokyo and layer structure of the Yangtze River Delta led by Shanghai illustrated the similarity. However, concerning the difference among each layer, it can be said that in Japan the magnification (showing how many times more) of the top rank Tokyo to the second rank Osaka slightly increased to 2.24 in 1998 from 2.12 in 1965, and the improved performance of Osaka to the third rank shrank to 1.27 in 1998 from 2.22 in 1965. In the Yangtze River Delta in 1995, the magnification of the top rank Shanghai to the second rank Nanjing was 2.99, and the magnification of Nanjing to the third rank Hangzhou displayed 1.16. We recognize with the above investigation that since the 1960s in Japan, single pole concentration into Tokyo was making progress, and in the Yangtze River Delta in the 1990s more concentration on financial functions toward Shanghai was moving ahead.

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6. Conclusion Results that we have in the earlier investigations and policy tasks related with regional development in the Yangtze River Delta in the future are summarized as follows. First, it is necessary to eliminate disparity on non-state-owned sectors among cities (municipalities) in the Yangtze River Delta, which means a pressing need of state-owned enterprises reform. On the other hand, it is also necessary to carefully examine disparity arising from promotion of private-owned enterprises and attracting foreignowned enterprises. Undoubtedly, we insist that state-owned sectors reform leads to further progress toward a market-oriented economy. Second, although the work force of agriculture and forestry industry in Japan was not a significant factor of regional disparity, in the Yangtze River Delta as of 1998, non-farming work force was the main significant factor of disparity among cities (municipalities) as well as non-state-owned sectors. It means that the Yangtze River Delta region has been confronted with the problem of how to appropriately adjust to the progress of urbanization among cities (municipalities). As one of the earlier literatures pointed out, the core of disparity issues in China was disparity among the farming sectors, we can confirm here that the disparity among farming areas included by municipalities (a system in which municipality supervises counties) took significant effects on disparity among cities (municipalities) in the Yangtze River Delta. Third, Japan’s case study illustrates the important role of the heavy chemical industry on economic development. However, heavy chemical industries in China, undoubtedly including the Yangtze River Delta region, which combined with state-owned enterprises have stagnated under the transition wave toward a market-oriented system since the 1980s. Meanwhile, light industries have developed in the 1980s led by foreign-owned enterprises (Guangdong Model) and TVEs (Jiangzhe Model). However, imbalance between the more developed light industries and the less developed heavy and chemical industries might be difficult to make China a more developed country. As there has been significant correlation between traditional state-owned enterprises and heavy and chemical industries, it is an important task

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to understand the way to develop heavy and chemical industries as well as reforming state-owned enterprises. Fourth, the case study on the Yangtze River Delta region shows that disappearing regional disparity in order to develop the regional economic level is indivisible from forming a regional economic area to break down the cyclical and cumulating poverty. Also in this chapter, we illustrate the importance of creating a regional center to form a regional economic area. In the 1990s, we can say China had initial success in creating a growth center, Shanghai, by policy measures. However, we can recognise that the concentration of financial functions in Shanghai in the 1990s was more than in Tokyo, thus also by policy measures promoting such cities (municipalities) as Nanjing, Hangzhou, Ningbo, and Suzhou to be sub-growing centers is a necessary condition for reasonable development of urban economic area in the Yangtze River Delta.

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Chapter 8

A Political Economy of East Asian Authoritarian Development System

1. Introduction 1.1. Research purpose Emerging nation states in post-war Asia have faced the double tasks of economic development and nation-state building. Fields such as development economics and political economy of development, etc., aims of which are to investigate development problems of less developed countries are focused on interactive relations among economic aspects and political aspects. Since the 1980s, remarkable economic development of East Asia (whose region is also called as West Pacific Region) has roused experts’ interest on authoritarian development systems particularly on the original meanings of development tool. China is located in East Asia and Chinese ideological and cultural tradition is closely related with East Asia, and also Chinese political economic relations with the region have been also closely connected. The purpose of this chapter is to classify the developments of various East Asian countries with authoritarian system into some models, and to analyze the logic of their developments from viewpoints of political economy, and to examine their contributions to Chinese development model building. We classify here authoritarian development models of East Asia into the East Asian NIEs model, South East Asian model and Chinese model. The main purpose of this book thus, is to find several empirical rules which are hidden in authoritarian development systems. Empirical rules indicate the rules which became tangible to some extent in East Asian regions, and are probable to come into existence also in China in the near future (which have a rather universal validity). 295

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There could be differences from one country to another. Special circumstances of respective countries should be included when we investigate the logic of the development model. Even in the same country, there could be also difference from one period to another due to particular characteristics of the respective period, because compared to a democratic political system with fairly mature system of check and balance, authoritarian development system undoubtedly has relatively an unstable structure. Such special circumstances arise from various factors like the leader’s personality, size of nation state, racial and religious complexity.

1.2. Concept of East Asia The concept of East Asia is substantially different according to the discipline, scholar’s position, research topic, etc. In this chapter, the East Asia is shown as countries related with the flying geese model, which are Japan, China, Asian NIEs, Association of Southeast Asian Nations (ASEAN) member countries.1 However, the covering region might be dynamically expanding. For example, India of South Asia can probably be included. Also when we are referring to the East Asian NIEs model, ASEAN model, not all member countries would be included but only some of them.

1.3. Structure of this chapter This chapter consists of six sections and a conclusion. In the first section, we have a short review on the post-war economic and political development of Asian countries with the four stages. In the second section, we examine the East Asian authoritarian development system from viewpoints of characteristics of tools. In the third, we classify

1

The League of Southeast Asia expanded to 10 member countries from the initial five, which are Singapore, Thailand, Malaysia, Indonesia, the Philippines (those five are original member countries of the League established in Bangkok on 8 August 1967), Brunei (joined after its independence in 1984), Vietnam (joined in 1995), Myanmar, Laos (joined in 1997) and Cambodia (joined in 1999).

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East Asian authoritarian system into three kinds, and in the fourth we understand the Taiwanese experience especially focusing our attention on relations between government and the Party (KMT: Kuomintang) under the one-party system and on roles of technocrats. In the fifth section, we investigate various conditions to realize shared growth with comparison to East Asian NIEs model and ASEAN model. In the sixth, the Chinese way and Chinese tasks are given. Finally, we summarize in the conclusion of this chapter.

2. Post-War Economic and Political Development of Asian Countries 2.1. The first stage: Social instability after independence and economic tasks for development Japan’s defeat during the Second World War in 1945 did not directly lead to independence of East Asian countries, because former suzerain states returned to colonize them again. Indonesia attained independence in 1949 by winning a victory against the UK and the Netherlands. Vietnam, after the Japanese defeat, spent nine years’ protesting movement to gain independence in 1954. Emerging countries after the independence encountered with various troubles. During the reconstruction from the war, it was extremely difficult for them to build their nation-states because their economic foundations were fairly weak. Charismatic leaders who led racial independent movement became a core for nation state building. Leaders such as Sukarno of Indonesia, Ho Chi-Minh of Vietnam, and Mao Zedong of China are some examples. Lee Kuan Yew of Singapore was not a soldier, but was respected by the people as a leader of national independent movement. Just after the nation building, many countries had land reforms. In the Chinese revolution led by Mao Zedong, a series of land reforms was promoted and peasant liberation movements took place during the revolutionary process. That was because the Chinese revolution had strong characteristics of an agricultural revolution

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meaning that the urban was surrounded by the rural. However, in China after land was distributed to peasants, at the end of the 1950s, lands were concentrated again in the governments. During the building process of the communes, the shock therapy was employed. In postwar Japan, a series of economic reconstruction and democratic reforms were promoted by the General Headquarters (GHQ) established by the US government which included land reforms. Also in Taiwan and South Korea, there were successful land reforms supported by the US government. Many less developed countries like the Philippines had tried to follow the Taiwanese experience, most of which were not however successful. Post-war land reforms contributed for social stability by raising the efficiency of agricultural production towards a self-sufficient ratio. Also, agricultural development contributed for mobility of redundant workers and industrial development.

2.2. The second stage: Foundation of anti-communist front of East Asia during the Cold War and the USA support The initial strategy of the USA for the post-war East Asian region was generally as follows. By providing military assistance with bilateral security agreement, the USA supported to promote land reforms, and to establish a congress system and to assist the transition towards civilian politics. However, soon after this, the whole world entered the days of Cold War. Asia became the most strategic region with the border between socialist countries such as China, Vietnam and the USSR. The Korean War occurred in 1950 and the USA carried out military intervention by dispatching an army to the Korean Peninsula. Moreover, the USA changed its strategy when the communist party in Japan and Indonesia became more active in order to prevent the expansion of communist Asia. It meant that the USA had adjusted its foreign policy to make autocratic leaders such as Sukarno, Chiang Kai-shek, and Syngman Rhee retainable. The USA thus approved the administrations by autocratic leaders in Asian countries and supported them both in economic and military aspects. When the Vietnam War

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started at the end of the 1960s, the USA had military intervention to adhere to anti-communist front. Actually, on 8 August 1967, five countries comprising Singapore, Thailand, Malaysia, Indonesia and the Philippines established the first Association of Southeast Asian Nations in Bangkok. That had strong political implications of anticommunist front. In the development dictatorship system supported by the USA, Asian countries prioritized industrial development policies with which their economies were developed and had accelerated successful industrialization. Meanwhile, it was correct to say that bureaucrats and officers supporting the authoritarian system became the privileged classes and had cozy relationships with the industrial world. Because of deterioration of corruption, people and students had more complaints about it which led to frequent occurrence of coups d’état in various places. Later, leaders who were called as the founders of repromoting the nation came into existence in various countries. In 1960, South Korean President Syngman Rhee lost his position because of the April Revolution arising from student movements, and one year later in 1961, Park Chung Hee carried out a coup d’état and came into power. In the same year of 1961, Singapore separated from Malaysia to become independent led by Lee Kuan Yew. In 1966, in Indonesia, Sukarno was deprived of his power and Suharto took up the position of deputy president. In 1978, in China after the death of Mao Zedong and the demise of the Cultural Revolution, Deng Xiaoping returned to his political position and started the reform and open door policy. All those stated above were called to be the founders of repromoting the nation. New leaders were favored with the international circumstances of the détente, which could make them concentrate on nation building towards industrialization. Export-oriented strategies were improved and various middle- and long-term economic plans were carried out, and also active attractive policies for foreign capital were implemented, through which they successfully realized economic development which they had never enjoyed before. The geese flying development model through international transfer of industry seemed to explain them well as mentioned later.

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2.3. The third stage: Reform and open policies of socialist countries and the demise of the Cold War, and becoming advanced countries of Asian NIEs. China’s reform and open door policy was a big surprise to the whole world. From viewpoints of external environment, China’s successful reform and open door policy was substantially contributed by many Chinese merchants living abroad who were full of entrepreneurial spirit. At present, the number of overseas Chinese is around 37 million, most of whom live in Southeast Asia. Foreign direct investment by the Chinese network contributed as the role of the pump priming at the initial stage of inward FDI in China. Statistics indicated that almost half of inward FDI in China came from Hong Kong, Macao and Taiwan. China has actively promoted export oriented industrialization and trade strategy with which China has gradually integrated into international economy. In December 2001, China participated in the WTO after more than 10 years of negotiation. Since the beginning of the 1990s, Asian NIEs economies have reached the level of advanced industrialized economies. South Korea has also become a member of OECD (Organization for Economic Cooperation and Development) which is usually named as “advanced economies’ club” in 1996. The flying geese development model which explains the vertical division of labor has been changed to have partly horizontal division of labor. For example, it could be pointed out as deepening of division of labor among processes, catching up on telecommunication industries by NIEs, etc.

2.4. The fourth stage: Economic globalization and East Asian Free Trade Area, internationalized tendency of internal politics and economy in each country and region East Asia is a region in which growth rate is highest all over the world. Table 8.1 shows the real GDP growth rate of countries and regions in the world. Undoubtedly, China’s high rate of economic growth is

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Table 8.1 Real GDP growth rate

Whole world Japan USA EU 15 China ASEAN4

1998

1999

2000

2001

2002

2003

2004

2.8 –1.0 4.2 2.9 7.8 –7.1

3.7 –0.1 4.5 2.9 7.1 3.6

4.6 2.4 3.7 3.6 8.0 5.9

2.5 0.2 0.8 1.7 7.5 3.3

3.0 –0.3 1.9 1.0 8.3 4.3

4.0 1.4 3.0 0.8 9.3 5.0

5.1 2.7 4.4 2.3 9.5 —

Source: (Japanese) Ministry of Economy, Trade and Industry (2005), p. 11. Note: With regard to EU, because of the consistency of statistics, it is selected here to be 15 countries. China includes Hong Kong, ASEAN4 countries indicate Indonesia, Thailand, the Philippines and Malaysia.

remarkable. The GDP ratios to the world total in 2003 were 29.8 percent of the USA, 29.9 percent of EU, 11.7 percent of Japan, 3.9 percent of China, 3.1 percent of NIEs, and 1.5 percent of ASEAN four.2 Thus, the Asian GDP total of Japan, China, Hong Kong, Taiwan, South Korea and ASEAN four occupied 20.2 percent of the world total GDP. East Asia was a vacuum region of Free Trade Association (FTA); however, after 2000, the active tendency to establish FTA has been recognized. Behind the tendency it could be said that, because negotiations on the Doha Round within the WTO framework have faced rough going, more attention has been focused on bilateral FTAs. In 2002, an FTA was established between Japan and Singapore and in 2003, the foundation of Southeast Asian FTA was basically agreed. In 2004, FTA among China, Hong Kong and Macao was established. Also in November 2004, China concluded the FTA with ASEAN countries. In April 2007, Japanese cabinet signed the FTA with Thailand, and South Korea concluded the FTA with the USA. At present, South Korea is actively negotiating to conclude FTA with Australia, New Zealand and Canada. There are other FTA schedules which were negotiated among them. For example, negotiations between China and Australia, China 2

World Bank, annual, and Statistical Database of Budget Bureau of the Taiwanese Administration Agency.

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and South Korea, Japan and ASEAN, Japan and South Korea, Japan and the Philippines, Japan and Malaysia, Japan and Brunei have been recognized. Table 8.2 shows regional trade agreements with which China is concerned. Table 8.2 Development of regional trade agreements with which China is concerned Type Regional Trade Agreement (RTA) Closer Economic Partnership Arrangement (CEP) Free Trade Agreement (FTA)

Process

Member Countries

Admission and signing

Bangkok agreement (23 May 2001)

Signing

China (continent) and Hong Kong (29 June 2003) China (continent) and Macao (29 October 2003) China and ASEAN (4 November 2002); towards FTA conclusion between China and ASEAN in 2010

Some parts of negotiation on commodity trade, conflict resolution mechanism, etc. have been completed Under negotiation

Under consideration

Making a proposition

China and Gulf Cooperation Council (GCC) China and South African Customs Union (SACU) China and Chile China and New Zealand China and Australia East Asia China, Japan and South Korea (private research) China and India China and Pakistan Shanghai Cooperative Organization China and Singapore

Source: Authors (based on the materials given by the spokesperson of the Ministry of Commerce, Long Guoqiang, at the China’s high ranking forum 2005 sponsored by the Chinese Cabinet Development Research Center, 19–25 March 2005).

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Development of telecommunications has improved the will towards democratization of the above countries and regions, which has caused to expose autocratic nation state to serious critics. It means that increased relations of economic interdependence have promoted internalization and liberalization of the Asian countries and isolated political and economic management has never been allowed. In such economic globalization, we understand that in East Asia new structural changes have occurred in which economic performances are rather different. (1) First, in Southeast Asian and South Asian countries, countries such as Indonesia and the Philippines had people’s riot arising from people’s discontent against the long-term centralized administration. Myanmar which had never broken away from the military system is exposed to international critical views. India which had no stable leader after the open economic policy experienced political disturbance. (2) Meanwhile, in Asian NIEs countries and regions, South Korea and Taiwan have progressed towards democratization by the top-down way in which they had to bury the past and reform the internal system. We expect that in the 21st century, East Asian countries would attain systemic evolution by having painful experiences in politics and economy. China should focused its attention on the movement and tendency which would undoubtedly be closely connected with the international economy after joining the WTO.

3. Characteristics of East Asian Authoritarian System 3.1. East Asian Miracle: Attractiveness of the flying geese development model After the Industrial Revolution, international economy experienced four economic cycles. In the cycles, economic center transferred from Europe to North America, and from the Atlantic coast to the Pacific coast. The center of world economy thus has consisted of three poles. Accompanied with the above process, the core cities of the three poles which are London, New York and Tokyo, have grown to be three world cities. This was not the process in which advanced

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regions were replaced by late-comer regions through losing the advantages. Economic globalization process has the possibility to expand the market and to raise the efficiency by reasonable resource allocation in the global market. It could be said as the “win-win game.” The participating 130 countries and regions in the WTO might be enough evidence of the positive evaluation. Needless to say, regulation for fair trade has to be a crucial prerequisite. In the 1960s, Japan’s real GDP growth rate reached 10.2 percent. Due to the rapid growth of Japan and Germany, equilibrium situation in economy and trade among advanced economies had to be adjusted. In August 1971, the USA abolished the fixed exchange rate system and completed the conversion of gold into dollars. Since the Nixon shock and the oil crisis in 1973 occurred, Japan’s economy carried out the soft landing by experiencing several failures. Japan’s average growth rate in the 1970s was 4.5 percent. At the end of the 1970s, because of the international oil price increase, US-Japan trade conflicts were aggravated. With the Plaza Accord in 1985, etc., Japanese yen became appreciated. Meanwhile, Japanese per capita income (in terms of US dollar) increased 15.3 percent in the 1960s, and 17.3 percent in the 1970s, which was higher than inflationary rate. Japanese enterprises tried to do rationalization like personnel cut, and also attempted outward FDI against comparative disadvantages when they experienced jointly yen appreciation, wage raise pressure, etc. In addition to outward FDI to export countries such as the USA and European ones, Japanese enterprises tendency of transferring exportable goods production of light industry to South Korea, Taiwan, and Singapore was accelerated. Transfer of the production base of Japanese enterprises varied from one type to another which are whole owned, joint venture, etc., and because of mutual benefits of host countries’ side (receiving relatively advanced technology) and home countries’ side (gaining more foreign markets promoted by Japanese enterprises), industrialization through FDI has been rapidly improved. In South Korea, they concentrated their industries on enterprise groups like Hyundai, Samsung and Daewoo, and chose an efficient way of industrialization. Taiwan has had reasonable base of small and medium sized enterprises which were established under Japanese rule

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and employed industrial promotion policy depending on the base. Singapore had foreign capital attraction policy at an early stage, and attempted to promote advanced industry, service industry, and soft industry. Thailand especially attached greater importance on inward FDI from Japan, in which therefore Japanese owned enterprises were recognized in any industries. The above-stated countries and regions enthusiastically tried to industrialize to catch up with Japan which improved industrialization from Meiji days. In 1986, both South Korea and Taiwan attained the same two digit growth rate of 11.6 percent, which were followed by Thailand’s 13.3 percent and Singapore’s 11.1 percent in 1988. Also in 1989, Malaysia and Indonesia reached high rate of GDP growth which was 9.2 percent and 7.5 percent respectively. They concentrated their attention on other countries’ rapid economic growth such as China, Vietnam, and India. Less developed countries in Asia have succeeded in their industrial transfer and participated economic development group one after another, the movement of which looked similar to the flying geese, therefore it was called the flying geese development model. What we should be interested in is that, when the North-South issues on economic disparity became substantial all over the world, the above-mentioned consecutive development pattern, which came into existence in Asia, is destroying the dual structure to some extent and attaining shared growth.

3.2. What is authoritarianism?: Authoritarianism as a tool We could summarize that the characteristics of East Asian authoritarian development system are a combined system of development oriented one in the economic sense with authoritarianism in the political sense. Here in this chapter, we would put more weight on characteristics of the authoritarian political system. There are two types of authoritarianism, which are in a wide sense and a narrow sense. The original meaning of authoritarianism in a wide sense is that the society members forcibly obey the ruler’s will. Thus, as a matter of fact, it is similar with paternalism or totalitarianism. This system is to fully control social economy and political life of the people by using the national violence mechanism and ideology; also,

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the system presses into the duties of the people for participating and supporting political campaigns of the government. Therefore, characteristics of authoritarianism in a wide sense are simply summarized to be excessive concentration of the power and free from constitutional restrictions. At present, where democratic values are universally approved, authoritarianism has undoubtedly negative connotations. For example, western scholars usually use the term anti-democratic or autocratic (Adorno et al., 1950). Meanwhile, authoritarianism in a narrow sense expresses a kind of particular non-democratic form of government which is different from totalitarianism. In modern political science, the term authoritarianism in a narrow sense has a special meaning of tool by the success of East Asian model. When the term is used in that sense, implication of the autocratic system becomes weaker. For example, in a political aspect, monopolistic power is maintained (they do not allow party politics and seriously restrict freedom of the press) but in a socio-economic aspect, social members and market players are highly independent (in which the market-oriented system is kept and developed). That is to say, the power in a political aspect is autocratic and in other aspects society has comparative autonomy to the nation state. The dual structure of political aspect and socio-economic aspect is an important characteristic by which authoritarianism in a narrow sense is different from totalitarianism. Characteristics of a narrow sense authoritarianism are summarized thus to be a development system with low political participation and high economic growth. Authoritarian development model seems to be attractive for many less developed countries. They have attached greater importance on the interesting question if authoritarian system is an important factor to promote economic development. Basically at present, researchers and research organizations have various assertions on relationships between the authoritarian system and economic development. Those assertions have several complicated relations with practical models such as the East Asian model, the Latin American model, and the former Soviet and East European model, and the Chinese model (including Vietnam). From viewpoints of practical East Asian countries and regions, gradual systemic transition under the authoritarian

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system contributed for stable social order and for security against internal and external crises. Therefore, they are called the wise authoritarianism meaning positive contributions for their economic development. Taiwan and South Korea before democratization were typical examples of this. We insist here that, referring to the East Asian NIEs countries, authoritarianism has clear characteristics as a kind of tool. A kind of tool of authoritarian system means that, in the institutional evolutionary process of socio-economic development in less developed countries, the authoritarianism is recognized, as a matter of fact, not to be an end but to be a means. The reason why we emphasize “as a matter of fact” is because leaders of authoritarianism did not promote development systems with full consciousness. However, since a certain logic was established, the phenomena in which the transition process was deepening independently from some officials’ and groups’ way of thinking. Thus, we conclude that authoritarianism meets with opposition from authoritarianism. Both Taiwan and South Korea were proven cases. When we talk about the conclusion saying that authoritarianism meets with opposition from authoritarianism, we remember the American film entitled Terminator 2: Judgement Day. At the end of the film, T 800 robot (played by Arnold Schwarzenegger) went down himself in the blast furnace of ironworks in order to thoroughly destroy the dangerous tip which was embedded in his head and was brought back to life. It was a moving story filled with heroism which was often enjoyed in American films. The last scene is meaningful in an allegorical sense. Self-extinction is not easy for everyone. If someone carries out resolutely, it would cause much more benefit to human beings. If he or she is not rationalist, self-extinction could never occur. According to the first law of thermodynamics, the total amount of energy in an isolated system remains constant (which states that energy cannot be created or destroyed, it can only be changed from one form to another). Thus, if it is destroyed, it could be restored to life in another form. Selfextinction does not mean in that sense death, but indicates the first step of restoration. A similar story could be said about the authoritarian political system. The parts and materials included in the authoritarian political system are not extinct from systemic transition but are reformed and returned with a completely new form. The rationality of

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gradualism could be found, whereby they proceeded with a reform way and not an revolutionary way in that process.

4. Three Kinds of Authoritarian System in East Asia 4.1. Initial conditions of development and development model differentiation Thinkers of the Enlightenment in the 17th century insisted that selfpreservation was the first law of jus naturale. We think that is correct, not only for the people but also for the nation. By the ideological opposition, post-war world was divided into two camps with different political and economic systems. It was particularly remarkable in East Asia and East Europe. Generally speaking, when each country selects a way of development, they attach greater importance on their own security, which is crucial to recognize the development model of postwar East Asian countries and regions. Figure 8.1 shows the characteristics of the three kinds of authoritarian system in East Asia and internal and external environments. In Japan, democratic reform in political systems was accomplished and dominant-party system by the Liberal Democratic Party which was called the 55 year system lasted long. However, it was difficult to say that Japan had the authoritarian system. 4.1.1. Post-war international order led by the USA First of all, what should we understand with “the US assistance and pressure” shown in Figure 8.1? In the process of free trade system led by the USA in the post-war period, the conflicts between East and West was an important historical background. The USA and the western countries tried to have centripetal force through free trade system, whose results seemed to be successful against the other camp. Western countries combined economic development goals with international cooperation by which they gained reciprocally benefits of market, technology transfer, raw material trade, etc., and realized high speed economic growth. Needless to say, the USA contributed most for providing market, providing financial resources and providing advanced technology.

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Figure 8.1

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Three kinds of authoritarian system in East Asia

Source: Author.

In the building process of post-war international order, most of the years were given to the dual structure of international order, the Cold War. It was impossible to construct the “win-win game” structure because for more than 40 years they were in seriously opposed

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situation and in East-West tensions. At the same time, each camp was probable to distort the reasonable development mechanism as they place more weight on military security. As a matter of fact, in order to develop military industry which was given priority, China and the USSR employed the industrial policy to make agriculture and light industry become an origin of primitive capital accumulation. It meant that there could not exist a prerequisite condition for post-war international order led by the USA to globally carry out. However, the post-war international trade system had substantially influential power to penetrate East Asian regions. In particular, such US allied forces as Japan and South Korea enjoyed the benefit. Southeast Asian countries were included in such beneficiaries (Chen Yun, 2005a). At the second half of the 1980s, the term “the days of West Pacific” became popular. East Asia was focused greater attention as an emerging region of one of the three poles in the world economy. In the establishing process of the East Asian miracle, Japan was the production goods providing country for Asian countries, and the USA was the market providing one for them. Undoubtedly, in the post-war Japanese economic recovery, the USA substantially contributed to Japan in the aspects of technology, finance and market. In 2005, the import ratio from China of the USA total expanded to 14.6 percent from 6.1 percent in 1995. On the contrary, the ratio from Japan and Asian NIEs in 2005 decreased to be 8.3 percent and 6.1 percent respectively (according to the statistics of Chinese Ministry of Commerce). Those statistics show that Japan and Asian NIEs utilized China as a production base for export using cheap labor force. As a result, China has been the biggest partner country of the USA trade deficit in place of Japan in the 1980s. Meanwhile, China’s trade deficit with South Korea, Taiwan and Singapore has been increasing which has led China to be the biggest partner country for their trade surplus. The important roles which the USA had played in trade with East Asian countries have founded US position as being influential for East Asian economic development, whose influential power has covered not only economic and trade field, but also military security field.

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4.1.2. Choice of East Asian emerging nation states: Southeast Asian way and NIEs way With regard to initial conditions, most East Asian countries and regions have the colonial history against the USA, European countries and Japan. They thus established typical colonial economic structure, which indicated a kind of non-self-sustaining economic structure with serious distortion. As they had primary commodity dependent economic structure (monoculture economy), they could not basically promote industrialization. They depended on imports from suzerain states even for daily consumer goods. A typical example of this was Malaysia. Malaysia was formerly a colony of the UK which became independent in 1957. After independence, Malaysian economy fully depended on primary commodities such as tin and natural rubber. It had almost no industry except tin mining and natural rubber plantation. At the beginning of the 1960s, in Malaysian export industries, primary commodities occupied a dominant position, whose ratio showed that natural rubber and tin reached 50 percent and 20 percent respectively. Other exportable commodities were timber and palm oil, etc. (Bank Negara Malaysia). In the post-war period, Southeast Asian nation states shared the desire to break away from subordinate positions arising from colonial hardships. Most Asian countries took a protection oriented industrialization strategy which was called the import substitution strategy. They employed therefore protection policies such as higher tariff barrier, and import quantity regulation. In place of import which was reasonable, domestic enterprises had substitute productions. They enjoyed monopolistic position in the domestic market. It pointed out undoubtedly that the import substitution strategy is a typical introverted strategy. In the post-war East Asia, a few countries and regions (which were named later as Asian NIEs) implemented import substitution strategy for significantly short periods. They quickly transformed their economies towards export-oriented strategy (which will be mentioned in the following section). It should be referred that, behind those transformations, NIEs countries and regions had close relations with the USA.

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4.1.3. Chinese way: Three times transition of development system Just after the new China was founded, the Korean War occurred which clearly showed the beginning of the Cold War. Mao Zedong decided to choose a way of “exclusive interests of the USSR .” With regard to the economic development model, Mao Zedong entirely introduced the Stalin type development model. The introduction of the Stalin type development model in China continued to the end of the 1950s, when Sino-USSR relations worsened. However, after the deterioration of Sino-USSR relations, such various characteristics of centrally-planned economic system as the state planning committee similar with the USSR existed. China’s development system after the worsening of the Sino-USSR was called the Mao Zedong development model, in which Mao Zedong ideologies like a populist line, spiritualism, politics priority, etc., were thoroughly included. Both the Stalin type development model and the Mao Zedong development model are closed systems. Those days, socialist international integration such as CMEA (Council for Mutual Economic Assistance) led by the USSR was established, which was the expanded version of centrally-planned system; however, the CMEA could not work well because of the systemic inadequacies. It meant that, in order for a particular institution to be sustainable, all the members could become beneficiary through everyday life exchanges, whose necessity shows it is necessary for the members to have principles of equality, reciprocity, and non-discrimination. The Mao Zedong development system in China displayed a central slogan advocating independence and self-reliance. It was a development strategy attaching greater importance on heavy industries and less importance on agriculture. Although the economic system was different, such an industrialization strategy was similar with Southeast Asian import substitution strategy. Compared with the Stalin type development system which emphasized state-owned, hard planning, centralization, the Mao Zedong development system had characteristics of public-owned (meaning state-owned and collective-owned whose former was in the urban area and latter was in the rural area)

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and soft planning and soft centralization (in which local decentralization was attempted twice). The Deng Xiaoping development system was the reform and open door policy and in the gradual way of transition which should be said as a “creative destruction”(see Chapter 5, in particular 6.1 on this concept). The Deng Xiaoping development system also has the characteristics of a development oriented system; however, as it was the reform and open door policy, return of benefit to the society might be possible. Reforms of Deng Xiaoping era applied such reform measures as multiple proprietary rights, coexistence of planning and market, separation of government from state-owned enterprises to China’s economic system, and gradually established market independence with increasing the ratio of private-owned enterprises from year to year. The Deng Xiaoping reform started with the decentralization system; however, it was different from decentralization of the Mao Zedong era. The decentralization by Deng Xiaoping was supported by at least two systems, whose first was administrative decentralization and second was economic decentralization. Administrative decentralization was carried out among vertical administrative ranks, and economic decentralization was implemented as separation of government from state-owned enterprises. The latter decentralization was a newly established one in the Deng Xiaoping system. That is to say, the decentralization in China carried out by Deng Xiaoping reached to the stage of irreversibility. Development system of the post-Deng Xiaoping (by Jiang Zemin, Hu Jintao and Wen Jiabao) has been basically located in the extension of Deng Xiaoping. 4.1.4. Japanese way: Authoritarian development system without authoritarianism In post-war Japan, a series of democratic reforms led directly by GHQ were carried out. Japanese political system was also democratized, thus Japanese system was not an authoritarian government in the strict sense. However, generally speaking, post-war Japanese political system has had a conservative tradition.

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After the Cold War began, the USA reform plan for Japan made the traditional system survive as the same as for Taiwan and South Korea. For example, the Japanese Mikado system was sustained. Also, people were surprised that, after depurge of the Purge Directive, primary war criminals like Ichiro Hatoyama and Nobusuke Kishi were restored to the political world and later became prime ministers. The third Hatoyama cabinet was the start of the “55 year system” (which showed the long-term administrative power by the Liberal Democratic Party lasted from 1955 to 1993). The LDP has been a kind of “department store,” including various factions whereby they quite often have different political views. On the whole, LDP has been undoubtedly a conservative political power. In the LDP, fairly many politicians succeed to the network of pre-war party members and of pre-war bureaucrats. The start of long-term administrative power by LDP was the starting period of Japanese miracle. One of the characteristics of government led economic development model, which was built to realize the catching up and overtaking strategy, was the strong administrative directives. Industrial policy, whose representative was the administrative directive, promoted Japanese miracle and also indicated the closed part of Japanese society. Aoki et al. (1996) classified governments into four typical types. (1) Authoritarian government in which authority to control is fully centralized and the separation of the three branches is minimized. (2) Rule-based government, which means that relatively stronger central executives control lower level government regardless of authority to control. However, the three branches are strictly separated and the negotiation power of government to private is restrained. (3) Relation-based government, which points out that coordination at the time of policy revision is implemented at the lower level government; meanwhile, as three branches are not clearly separated, legal costs are high. (4) Disorganized government, which shows that administrations are cut into pieces. In the East Asian countries, we can recognize that many governments are classified as the first type. The US government is typical of the second type. The most difficult government to be clarified

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seems to be the third type. According to Okuno-Fujiwara (1993), in Japan because bureaucratic system is developed (including preparation of bills), sectionalism is brought about in administrative control and the legislative branch is strongly controlled by the administrative branch. Thus, the Japanese government is classified as the third type. In addition to the above, when administrative litigation is brought up, the average number of years during a suit to the final judgment of the Supreme Court is 10 (Miyazaki, 1986). The long-term procedure of administrative litigation seems to reach after all the stronger position of administrative branch.

4.2. Consequence of non-West European type nationalism In the rapid progress of nationalism and economic globalization, conflicts between internationalization and racial sentiments have continued. What are the relations between nationalism which has been a powerful incentive to mobilize people and economic development under globalization? 4.2.1. Economic nationalism Greenfeld (2001) published a book entitled Spirit of Capitalism: Nationalism and Economic Growth, whose topic seems to have a kind of spiritual relationship with Max Weber. Greenfeld presents a concept of economic nationalism and insists that, each race and each nation state has a different view on importance of racial dignity and it is difficult to say each nationalism has economic nationalism factor, an example of which is France. Other parts of nationalism deny the relations between racial dignity and business. Russia is an example of the nationalism. According to Greenfeld, economic nationalism could be recognized as a nationalism accepting economic competition. Which particular race and nation-state comes under the type of accepting economic competition? It is closely connected with the structure of national state and society. Classification of Greenfeld suggests the following three kinds: (1) the “individualism and citizen” type, (2) the “collectivism and citizen” type, and (3) the

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“collectivism and racial” type. The most appropriate with economic nationalism is the “individualism and citizen” type (whose typical examples are the UK and the USA). “Individualism and citizen” type nation-state is the intention of most citizens. The government has the right to represent the citizens actually or legally, and has respect for human rights, and promotes appropriate institutions. Meanwhile, the collective type of nationalism attaches greater importance on shared interest of the nation-state and race as a whole than selfinterest. Elite group members who have particular talents decide shared interest for the nation-state; however, they are not selected by ordinary election. All of the contemporary dictatorial system are the products of collective type nationalism. The most popular collective type nationalism is the “collectivism and racial” type nationstate (from which the past Fascism was coming). The second type of “collectivism and citizen” nation-state is a compound existence which is difficult to be recognized. Behind the nationalism mentioned by Greenfeld, national and social structure came into existence. The starting point of the logic by Greenfeld could move forward, which says a series of the logic that a nation-state structure of “individualism and citizen” type produces economic nationalism, and economic nationalism might reach economic growth. Undoubtedly, it depicts the development logic of west European type nation state. Another development model is the East Asian model which depicted the post-war economic growth of Japan and Asian NIEs. National and social structures of those countries and regions are basically collective structures (whose characteristics are authoritarianism in political system and development oriented system in economic system), which could be called as the non-west European economic nationalism. What should we consider for the Southeast Asian countries? As stated before, Greenfeld asserts that each national and racial state has a respective view on importance of racial dignity, and it is difficult to insist that each nationalism has economic nationalism factor. Greenfeld illustrates France and Russia for the assertion. Although evidence is not enough (whether or not it is coming from religion and culture, whether or not it is caused by immature consciousness of challenge and counter challenge of civilization by Toynbee), successful examples of Chinese

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entrepreneurship in Southeast Asian countries gave us suggestive cases compared with local people. It might indicate that nationalism in Southeast Asian countries does not reach the stage of economic nationalism at which East Asian NIEs have already reached. 4.2.2. Can China follow the East Asian NIEs model? Is it possible for China to join an East Asian NIEs model member? We think that it might be too early to have a definite conclusion on it at present because the Chinese model has been transforming. However, several heterogeneous characteristics between China and, South Korea and Taiwan could be recognized. To overcome the heterogeneities seems to be indispensable prerequisite for China to have the similar development model with East Asian NIEs. They are as follows: (1) In the post-war Taiwan and South Korea, they had authoritarian system in political aspect; however, in economic aspect they introduced market-oriented system. Thus, they could join the post-war free trade system led by the USA which contributed to their high speed economic growth. Meanwhile, China has faced serious tasks to transform the dual structure of China’s economic system since the reform and open door policy started in 1978. (2) The main job of the elites who have led Asian NIEs style collective nation state are bureaucrats and they are accomplished not only in Chinese traditional culture but also in western culture. Thus, they have never rejected crucial values included in West European nationalism such as nationalism and liberalism. Even in the military system and one-party dictatorial system, a certain distance between politicians and bureaucrats could exist. That is to say, through functional separation, bureaucrats who are in charge of economic and social regulation could have relatively independence and continuity of policy measures. On the contrary, because of the negative legacy of central planning days, in the bureaucrats group in China, the number of specialist bureaucrats has never been enough. Therefore, as it has occurred in recent China, a boom of returnees of studying abroad, we think that it is a great time to reform the bureaucrat system. (3) Asian

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NIEs model typically shown in Taiwan and South Korea successfully realized shared growth. It was especially remarkable in comparison with the Southeast Asian model. In China, in which they have enjoyed high speed economic growth, shared growth has been the most worrisome topic. To measure the degree of shared growth, such indices as disparity between urban and rural, Gini coefficient, etc. are useful. Table 8.3 points out various indicators of East Asian countries and regions. (1) With regard to population growth, Southeast Asian countries usually have higher growth rate than Asian NIEs. In China, because of a special population policy (the one-child policy), it attained a similar growth rate with Asian NIEs countries and regions. It is seriously worried about problems of an aging society. (2) Regarding per capita GDP growth rate, China recorded the highest rate. Japan’s rate of 2.5 percent and Indonesian’s 3.7 percent (2003–2004) was relatively lower. (3) As far as adult literacy rate (of those 15 and above) is concerned, Asian NIEs have a higher education level, and China and Southeast Asian countries were in the same level. (4) Concerning population below poverty line (below one dollar a day of PPP), the Philippines’ 15.5 percent and China’s 16.6 percent was substantially high. (5) With regard to Gini coefficient, higher coefficient was recognized in Malaysia (0.49), China (0.45), and the Philippines (0.46). (6) The Gini coefficient on land disparity was indicated to be high in the Philippines (0.55), Vietnam (0.53), Thailand (0.47) and Indonesia (0.46). Table 8.4 shows the population below the national poverty line. Japan and Asian NIEs countries and regions overcame the poverty issue; however, it has been generally serious in Southeast Asian countries. China’s population below the national poverty line recorded six percent in 1996 and 4.6 percent in 1998. Poverty ratio in rural areas has been without any doubt more serious than urban areas. What logic did characteristics in Asian NIEs work to come into existence? Also, what are the relations of the characteristics with authoritarian systemic transition? We investigate in the following sections.

Gini Index

Land Inequality Gini Index

Japan Taiwan South Korea Singapore Hong Kong Thailand Philippines Indonesia Malaysia Vietnam China

0.2 — 0.6 1.9 0.7 0.7 2.0 1.3 2.0 1.1 0.7

2.5 — 4.1 6.3 7.7 5.4 4.3 3.7 5.2 6.4 8.8

— — — 93 — 93 93 88 89 90 91

— — < 2 (1998) — — < 2(2000) 15.5(2000) 7.5(2002) < 2(1997) − (1998) 16.6(2001)

0.25(1993) 0.24(2000) 0.32(1998) 0.42(1998) — 0.40(2002) 0.46(2000) 0.34(2000) 0.49(1997) 0.35(2002) 0.45(2001)

— — 0.34(1990) — — 0.47(1993) 0.55(1991) 0.46(1993) — 0.53(1994) —

Source: World Bank (2005). Notes : (1) Figures in parentheses indicate survey year. (2) “—” means “data not available.”

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GDP Per Capita Growth (percent) 2003–2004

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Country (region)

Population Average Annual Growth (percent) 2000–2004

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Survey Year

Rural

Urban

National

— — — — — 1990 1994 1996 1989 1998 1996

— — — — — 40.8 53.1 — — 45.5 7.9

— — — — — 31.2 28.0 — — 9.2 <2

— — — — — 38.6 40.6 15.7 15.5 37.7 6.0

— — — — — 2000–2001 1997 1999 — 2002 1998

— — — — — 38.7 50.7 — — 35.6 4.6

— — — — — 29.5 21.5 — — 6.6 <2

— — — — — 35.7 36.8 27.1 — 28.9 4.6

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Japan Taiwan South Korea Singapore Hong Kong Thailand Philippines Indonesia Malaysia Vietnam China

Rural

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Asian NIEs

Survey Year

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Table 8.4 Population below the national poverty lines (percent)

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5. Relationships Between Party and Administration in One-Party Political System and Roles of Technocrats: Decipherment of Taiwanese Experience With regard to Taiwanese experience, we think it is deciphered with the following logic. By development oriented policy with economic priority and influence of the USA factor, outward oriented market economy was established. Deepening the market-oriented economy under the open system, differentiation of socio-economic aspects and division of labor was fulfilled. Needless to say, in order to manage the complicated society efficiently, intellectual elites (initially technocrats in science and engineering course played active roles) were needed. When macroeconomy and social management successfully develops, the middle-class would emerge and grow. It would coincide with the shared growth. The middle class comes into existence anywhere in the society and plays an important role as a rational core in the whole society, in cooperation with bureaucrats in administration and cultured leaders in politics. The shared growth phenomena are surely driving forces for transformation towards democratic institution closely connected with the middle class in social aspects and with technocrats in administrative leaders. At this stage of development, bureaucrats from the fields of law and politics will appear.

5.1. Establishment of extroverted market-oriented economy: Background of rise of the technocrats 5.1.1. Taiwanese miracle After the Nationalist Party (KMT: Kuomintang) fled to Taiwan in 1949, Taiwanese economy was rebuilt properly. For 50 years, Taiwan had economic construction with remarkable economic performance leading to high speed economic growth. Especially for 28 years from 1961–1988, the annual average growth rate in Taiwan had reached 9.3 percent. Compared with the average growth rate of advanced countries at 3.6 percent, Taiwan had 1.6 times higher growth rate which was the highest among the Asian NIEs countries and regions.

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In 1979, four countries and regions — Taiwan, Hong Kong, South Korea and Singapore — became the Asian NIEs. The Taiwanese GDP in 1987 was ranked 21st in the world. With regard to per capita GDP, Taiwan recorded US$8,813 which was 25th in the world ranking. Regarding foreign exchange reserves, Taiwan had US$82.4 billion in 1991, which reached the highest in the world followed by Japan. Over 50 years, Taiwan’s economy developed from less developed dependent on agriculture to advanced economy dependent on tertiary sectors with emerging developed technologies. The country has promoted a rationalized economic structure and also raised educational level and human resources substantially. In 2000, Taiwanese GDP reached more than US$300 billion; its per capita GDP was US$14,000. Both exports and imports were more than US$140 billion and foreign exchange reserves recorded US$106.7 billion. 5.1.2. External factors: The USA influence We could recognize various influential factors by the USA. It seems to be very important to correctly place the USA factor in East Asian international order. All the countries and regions of the post-war East Asian flying geese model, Japan, NIEs, ASEAN and China, have received beneficial opportunities of exports and investments which the USA has provided. At the same time, they have enjoyed public goods given by the USA, particularly the free trade system. Japan, Taiwan and South Korea have closer relations with the USA because of special post-war international circumstances. The USA assisted the land reform and democratic reform for these countries and supported their economic reconstruction and development through various aid organizations. Since many elites of these countries and regions went to the USA to study, they played a role of intermediary between the USA and the countries concerned. The USA appreciated the technocrats group in the Nationalist Party as a sound component and assisted them. Those days, elite groups from military forces attached greater importance on military industry and expansion of armaments, while technocrat groups insisted

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that economic development of Taiwanese public welfare should have priority. From the 1950s to the beginning of the 1960s, the USA office stationed in Taiwan attempted to control the plan of counterattack on continental China led by the Chiang Kai-shek group and tried to prevent militarization of the Taiwanese economy. In that aspect, the USA strategy and technocrats’ view in Taiwan had common grounds (Niu Ke, 2002). The technocrats group had a practical idea of Taiwanese economy and adopted a stance towards profit neutral, which succeeded in enforcing their position by utilizing their educational background studying in the USA and Europe. These factors contributed to their successful assertions on economic policy, and advantageous international circumstances for Taiwanese economic development were established. 5.1.3. Establishment of extroverted market-oriented economy and rise of the technocrats The experience of Taiwanese economic development suggests that formation of reasonable logic in social development is very important. Extroverted market-oriented economy was, we think, corresponded to the formation of reasonable logic. What does the extroverted market-oriented economy bring about? It is a kind of open system, in which the division of labor asserted by Adam Smith becomes international and is established in wider areas. Efficient allocation of resources in the world establishes successfully, which factors contribute more development for the economies concerned. At the same time, it needs more divided and more differentiated socio-economic activities within a country. The more complicated nature of socio-economic aspects necessarily require more specialized administration which leads to an indispensable appearance of bureaucrats. Technocrats in Taiwan had the following characteristics. First, a higher ratio of them was occupied by experts with higher educational background, and higher endowments. Educational background of 44 members in Taiwanese committees such as management of production and business committee, economic stability committee, the US aid committee, and the international economic cooperation and

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Number

Ratio (percent)

28 23 4 1

63.63 52.27 9.09 2.27

Experience of studying abroad USA Western Europe Japan Source: Liu, Ming (1992), p. 195.

Table 8.6 Specialization of Taiwanese technocrats Special Field

Number

Ratio (percent)

Engineering

21

47.72

Social science

15

34.09

Economics Law Administration Management

12 2 1

Natural science

3

6.82

Military

1

2.27

Other fields

4

9.10

Source: Liu, Ming (1992), p. 195.

development committee informed that only one member had not graduated from any university. As shown in Table 8.5, most technocrats had educational background from the USA, who had thus pro-American tendency. Second, most technocrats with higher educational background were from a science and engineering course. Table 8.6 indicates that, with regard to special fields of bureaucrats in Taiwan, engineering occupied 47.72 percent, and social science 34.09 percent. Moreover, in the 14 ministers of economy in Taiwan from 1950 to 1990, only Zhang Zikai and Xu Lide had experience of studying economics and politics. Other ministers of economy had studied science and engineering. For example, Yin Zhongrong was an electrical engineer. Sun Yunxuan

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graduated from faculty of electrics, Harbin Institute of Technology and was a visiting scholar in the USA. Li Guoding had worked for the Institute of Physics, Cambridge University (Long J. and W. Huang, 1993, pp. 126–127). Chen Lu An, who is the son of the President of Taiwan, Chen Cheng, also obtained a PhD in Mathematics from the Massachusetts Institute of Technology and had successively held various important posts such as minister of economy, minister of defense, president of inspection agency, etc. Third, most technocrats in Taiwan come from the Chinese continent. In the 1950s and 1960s, of the 29 technocrats working for the three major US aid organizations, only one family record was registered in Taiwan. Also in the 1970s and 1980s, for most heads of finance and economy sections, their family records were registered in the continent. We could point out the backgrounds of the situation are: (1) Chiang Kai-shek and his son placed the confidence in elites from the continent. It is a general rule that, in the authoritarian system, it is important to give aides important posts for stability of the system. (2) After liberation of Taiwanese colony, the Japanese bureaucrats returned to Japan, and there were few elites in Taiwan. When the Taiwanese miracle is talked about, most attention is focused on the huge amount of gold and machineries which the Chiang Kai-shek army had taken from the continent. Actually, however, those with higher educational background who transferred to Taiwan together with Chiang Kai-shek’s army contributed to Taiwanese economic development. Again, from the viewpoints of structural-functionalism approach, the existence of professional technocrats was both for managing a complicated society and for supplementing the curse to late comer. 5.1.4. Conditions for rise of technocrats: Reform of party affairs and adjustment of relationship between party and administration In the one-party dictatorship Taiwan, technocrats miraculously became the main actors and established the Taiwanese miracle. Why was it possible?

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At the initial period of economic development, the main obstacle to hinder activities of Taiwanese technocrats in the economic policy was traditional power related with the Chiang Kai-shek army. Inside the National Party controlling group, three kinds of elite groups classified by function and power were recognized. They are (1) bureaucrats group from the Nationalist Party, (2) bureaucrats group from military forces, and (3) bureaucrats group from the administration. The first two were what was called political elite and military elite. At the beginning of the post-war period, position of the technocrats was much lower than professional soldiers and party executives under the authoritarian system. Thus, technocrats had no power to lead policy decisions and administrative regulations. However, after the cabinet was established, by promoting an extroverted market-oriented strategy, division of labor and differentiation of government administrative sections was improved and importance of technocrats was recognized. In those periods, the top ranking government officials gathered around Chiang Kai-shek and his son, and the President of Taiwan, Chen Cheng,3 decided to entrust non-politics oriented elites with authority of economic policy decision. It is correct to say that the power transformation process was closely related with the reform of party affairs which started in the Chiang Kai-shek days. During the two years from 1950 to 1952, the Nationalist Party established a reform committee and carried out party administration reform. They accomplished a new organization system by putting in order the party discipline and by dismissing inappropriate party members. This recognition broke down the long-lasting factional dispute which continued from the days of China controlled continental to fleeing to Taiwan. It worked to remove the corrupted factions (like CC group gathered around Chen Guofu and Chen Lifu) and

3

Chen Cheng (1898–1965): The domicile of origin was Qingtian of Zhejiang province. After 1948, he successively held various posts like Chairman of Taiwan and Commander of Defense Army, the Vice-President of the Nationalist Party, Chairman of the Administrative Office. Since the 1950s, he carried out land reforms and promoted local autonomy in Taiwan, and earned the esteem of Taiwan’s public. After his death, he was called Chen Cheng Bo, in a friendly way.

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weaken the power of senior party members. In place of them, a kind of balance among party, administration, military forces, and secret services was established. The reorganization gave the opportunity for technocrats to come to the front. When Chiang Ching-kuo,4 the son of Chiang Kai-shek, came to power, he promoted many bureaucratic employees to high ranking officials of administration under the slogan of political reforms, which was based on the speech of Chiang Kaishek on the importance of human resources at the 10th national meeting of the Nationalist Party in 1969. Chiang Ching-kuo raised them to be cabinet members around him. For example, technocrats such as Li Guoding, Sun Yunxuan, Jiang Yanshi, and Yu Guohua were initially given important posts, in which bureaucrats like Li Denghui and Lin Yanggang whose domicile of origin was Taiwan, were included. Through the reorganization, political power gained by senior party executives and military elites was gradually shifted to the technocrats group. After a few years, the technocrats group established a core of new leaders group in place of bureaucrats from former administrative system. Taiwan was promoted to the days of governance by experts. Technocrats in Taiwan took part in decision making of economic policies based on their higher education and special knowledge with practical attitude. The national goal of economic development gave the opportunity for the rise of technocrats. Acceleration of division of labor and internationalization improved the importance of technocrats, which contributed to the establishment of a class of technocrats. 4

Chiang Ching-kuo (1910–1988): When he was 15 years old in 1925, he was an active member of the student movement called the “May 30th Movement” (which occurred on 30 May 1925) and went to study in Moscow, USSR, at the Sun Yat-Sen University in October, 1925. Deng Xiaoping who was six years older than Chiang Ching-kuo was his classmate. He graduated from the university in 1927. During his stay in Moscow, he joined the Communist Party of USSR. In Taiwan, Chiang Ching-kuo successively held various important posts such as in the Central Executive Committee of the Nationalist Party (1957), as the Minister of Defense (1965), and as the Head of Administration Office (1972). In 1975, he took office as the Chairman of the Nationalist Party as the successor of Chiang Kai-shek. In 1978, he also took office as the sixth President of the Republic of China, and was reappointed as the seventh President. In 1988, he died of diabetes, and the Vice-President, Li Denghui, was his successor.

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The party affairs reform brought a new change to relations between party and administration. The basic tendency was the correction of influential power for party organization to administrative sections. After the reform in 1952, reasonable changes of party organization which became looser were implemented and its unification was strengthened. Each administrative section had various party organizations respectively, and they did not find any single leading system of the party but administrative executives of each level held additional posts for party affairs (Sun Daiyao, 2002, p. 71). That is to say, they had no leading system which consisted of party committees and party secretaries outside the administrative system. Due to such institutional design, bureaucrats in the administrative sections acquired substantial independent rights to decide policy measures and they became main players of economic construction. Also, due to improvement of division of labor system in the public policy section, the party affairs system was reasonably separated from policy decisions particularly economic policy decisions. Party roles were changed from “party leads government” system to policy cooperation, and autonomy of administrative bureaucrats significantly expanded. As stated above, the gaining autonomy process of technocrats had indispensable prerequisites in which they were given protection and trust by the highest ranking powerful persons like Chiang Kai-shek and Chen Cheng. In main economic leading sections at each period of Taiwanese economic development, excellent technocrats contributed to them. The reorganized system and budget was independent from ordinary administrations which worked to restrict the influence of various interest groups (Sun, 2002, p. 178). Also, in order to prevent corruption and cozy relationships between public and business, similarly with Singapore and Hong Kong, Taiwan established institutional mechanism to prevent corruption like a periodical evaluation system for bureaucrats, an asset declaration system, and “to employ a person of integrity at a high salary” system. Moreover, because most technocrats were from the mainland, they could naturally be separated from interest groups such as traditional enterprise associations and landowner groups of rural areas. For example, when land reform in Taiwan was carried out, they had

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upright attitudes for the reform which were completely different from the mainland days and this surprised the people (Matsuda, 2006, Chapter 6). 5.1.5. Establishment of rational core and systemic transition The rational core of Taiwanese society consisted of civilian leaders (like Chiang Kai-shek, Chiang Ching-kuo and Chen Cheng), technocrats group, middle class, etc. Formation of the middle class was the fruit of Taiwanese miracle. We recognize the important characteristics of Taiwanese miracle as shared growth (common in the East Asian model), without which it might be impossible to form the middle class (contrasted with the Southeast Asian model countries). The middle class has received the benefits from the open market economy and has believed in the rationalism (in legislative regulation and contract theory), which a market-oriented economy has. The rationalism which was improved in civil society corresponded to civilized elite groups (technocrats who were representatives of rationalism), both promoted Taiwanese society to transform peacefully towards a democratic system. Another important thing to be careful was about the local autonomy in Taiwan. Since the 1950s, the Nationalist Party implemented the local autonomous system at the lowest administrative level. In local parliaments such as in cities, counties, the members were gradually selected by direct election (Bo, 2001). The direct election system made it possible for local elites to participate in political activities. Introduction of the local autonomous system as well as land reform seriously contributed to Taiwanese elites supporting the Nationalist Party. In Taiwan, which had an authoritarian system, they dichotomized politics and economy, the central government and local government, through which they reduced social dissatisfaction and inspired them. Undoubtedly, the existence of democratic factors played substantial roles to prevent corruption in Taiwan during high speed economic growth. Chiang Ching-kuo, the son of Chiang Kai-shek, took office as the sixth President of the Republic of China in 1978 and was highly

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regarded by ordinary Taiwanese people as a person of independence, integrity, and diligence. He gave an order during the earlier days to Ma Yingjiu5 to evaluate the Martial Law and Parliament reform issues. On 15 July 1987, a new National Security Law was implemented and the Martial Law which had lasted for 38 years was lifted. In 1987, they also allowed people to visit relatives in the mainland which was greatly appreciated by the Taiwanese people. The statement by Chiang Chingkuo saying that the key for legislative regulation was a law, not a person, which led the Taiwanese democratic reform in the irreversible direction. In the afternoon of 7 October 1987, when Chiang Chingkuo was interviewed by Ms. Katherine Graham of the Washington Post (USA) at the Presidential Office, he said that the Republic of China would lift the Martial Law and would be open to party politics. At the end of the 1980s, Chiang Ching-kuo decided to lift party politics and freedom of the press and also decided to carry out ordinary election at each level of the government including the national parliament. Taiwan started to move towards a constitutional system. 5.1.6. Consistency between elites of engineering and science and the authoritarian system Until the 1980s in Taiwan, why did technocrats of engineering and science occupy leading positions (contrasted with post-war Japan and Taiwan since the 1990s)? It might be interpreted that elites of engineering and science are compatible with the authoritarian system. 5

Ma Yingjiu (1950–) was born in Hong Kong in 1950. His father was also a high ranking official of the Nationalist Party. In 1981, he obtained a PhD in Law at Harvard University, and started to work for Chiang Ching-kuo as the English Secretary. He was rational, modest and honest and therefore was highly regarded by Chiang Ching-kuo, who led him to the post of Vice-President of the Central Bureau of the Nationalist Party when he was 34 years old in June 1984. In 1993, he took office as the Minister of Justice. In 1998, he was elected as Mayor of Taipei, and returned in 2002. In 2003, he took office as Vice-Chairman of the Nationalist Party and in 2005 he was elected as the Chairman of the Nationalist Party by the first direct vote by obtaining 72.36 percent votes. In February 2007, he was charged with misappropriation of special funds for the head of the local government, and resigned as Chairman of the Nationalist Party. The case has been tried, but it is said that he would be possibly running for Taiwan’s presidency in 2008 as the only candidate from the Nationalist Party.

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Since authoritarian system does not transform enough to legislative and democratic system, it is difficult to be compatible with elites of law and politics in the ideological sense. Meanwhile, elites of engineering and science are practical oriented and, even under the authoritarian system, they can play important roles with practical tools which lead them to be compatible with the authoritarian system. Moreover, successful results (economic growth) of elites of engineering and science (partly including economics) give additional legitimacy to authoritarianism, which would undoubtedly be attractive. After systemic transformation was carried out, elites of law and politics may reach the center of power. The experience in Taiwan and South Korea have shown this. In Japan, which was democratized in the post-war period, elites of law and politics have occupied the central position of power from the beginning. As the similar compatible relations between elites of engineering and science and the authoritarian system, the democratic system and elites of law and politics may have compatible relations.

6. Tasks for Shared Growth: Comparisons of Asian NIEs Model and Southeast Asian Model Post-war East Asian countries attempted the task of economic construction, even when they had an incomplete nation state. In that stage, legitimacy of the authoritarian system is given by economic development and progress of national welfare. Both economic development and progress of national welfare are crucial conditions for nation state building. Because integration of a nation state means the progress of everyday life areas, cultural areas and social networks, shared growth provides the base and security. According to the hierarchy theory of needs by Maslow (1954), human needs are classified into five stages. The needs of the first stage are subsistence needs (physiological needs and security needs), which are followed by the needs of social acceptance, and the needs of esteem. And the final stage is the need of self-actualization. In the post-war Asian countries, the needs level of people stayed at a lower level which was external conditions of the authoritarian system. If

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authoritarian system establishes advantageous circumstances for economic development, it could have legitimacy. Economic development satisfies lower stage needs of people. They are prerequisites for realization of higher stage needs. We should acknowledge serious inconsistencies between productive industrialization and labor force industrialization as problems of the Southeast Asian model. In the policy aspect, productive industrialization became a purpose in which they attached less importance on human modernization. It led to increased income and asset disparity. There could be recognized not only absolute poverty in rural areas but also serious slums in urban areas. Also in the Southeast Asian countries, since serious racial disputes and religious disputes, were almost always present, it is difficult to secure the necessary stable circumstances for sustainable economic development and for correction of disparity. Compared with the above, the East Asian NIEs model was based on the human centered development ideology. Quantity and quality of population has been in line with economic development, which finally leads to shared growth called equivalent ideal situation. That is to say, in Southeast Asia, population is an external factor for economic modernization, and in East Asia NIEs model, population is an internal factor for economic modernization. We think that the experience of Singapore, which has established a harmonized nation even in a multiracial society, can become a good lesson for Southeast Asian countries which suffer from racial and religious disputes.

6.1. Southeast Asian model From viewpoints of policy evaluation, we could point out positive roles of the import substitution strategy carried out in Southeast Asian countries. After the 1960s, industrialization ratio of Southeast Asian countries (meaning the ratio occupied by manufacturing industry to GDP) remarkably increased. World Bank statistics suggest that the industrialization ratio of the Philippines increased to 27 percent in 1975 from 20 percent in 1960, and the Thai case showed a more substantial increase to 20 percent in 1985 from 11 percent in 1960.

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50% Taiwan

Labor force industrialization ratio

South Korea

Philippines Malaysia Indonesia

0 Productive industrialization ratio

50%

Figure 8.2 Conceptual figure on productive industrialization ratio and labor force industrialization ratio in Asian countries (1960s–1980s) Source: Watanabe (1991), p. 87. Note: Diagonal line was expressed when both production and employment grow at the same ratio.

Malaysia’s ratio expanded to 18 percent in 1985 from nine percent in 1960.6 Figure 8.2 is a concept figure to compare Asian NIEs model with Southeast Asian model. It displays a tendency of relations between productive industrialization and labor force industrialization. Horizontal axis plots productive industrialization ratio which shows similar tendency in both models. However, with regard to the vertical axis which plots the labor force industrialization ratio, the ratio of Southeast Asian countries was much lower than NIEs countries and regions. Why have such inconsistency occurred in Southeast Asian countries? Two explanations as follows would be possible; (1) because of high rate of population growth, population is an external factor for the economy, (2) import substitution industrialization and impact of its trade strategy. 6

World Bank, World Development Report, annual (see 1960–1980).

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The high rate of population growth in Southeast Asian countries seemed to arise from high birth rate and low death rate. The low death rate was caused by: (1) during the days of colony, suzerain states introduced a modern medical system, road, bureaucrats system and an educational system, which contributed to the improvement of medical care, rapid disaster relief and decrease of death rate; (2) colonialists tend to restrict conflicts and wars which existed traditionally in the colonies in order to keep trade order, which caused substantial reduction of death rate; (3) because of assistance of international society, public health reform was improved in each country and death rate became much lower. However, unfortunately, the population explosion in rural area arising from the above stated reasons offset the results by post-war green revolution. Besides due to failure of land reforms, large-scale land owners monopolize the results of green revolution which have expanded disparity and inequality. Meanwhile, the high birth rate could be interpreted by birth economics (to analyze the cost and benefit of having children from microeconomic viewpoints of family and women). At the lower stage of economic development with lower level of income, benefits of giving birth (utility increase by security of aged days, etc.) is higher but cost of giving birth (like educational cost, opportunity cost, etc.) is lower. People wish to have more children, which increases the birth rate. However, at the higher stage of economic development, the cost and benefit relations are reversed and the birth rate decreased. Two factors work when redundant population in rural areas move towards urban areas. The first one is the push side factors, which indicate poverty of rural areas and shortage of job opportunities. When we discuss the poverty of rural areas, it is necessary to analyze the failure of land reform and the population explosion. Second one is the pull side factors, which show the attractiveness of urban areas particularly job opportunities of industrial sector. Todaro theory insists these as employment expectations which expresses to multiply wage income by employment ratio. When disparity between urban and rural is absolutely big, the effect of employment ratio is remarkably decreased. Peasants’ desire to break away from their current situation

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works to move them to urban areas regardless of employment ratio. Todaro thus warns that it is fairly possible for unemployment problems in urban area and labor shortage problem in rural areas to occur at the same time. What is the situation of job opportunities in urban areas of Southeast Asian countries? Different from Asian NIEs countries and regions which took the export-oriented strategy after the 1960s (whose initially developed industry belonged to the labor intensive industry), the import substitution strategy taken by Southeast Asian countries was supported by the capital intensive industry. The capital intensive industry requires less number of laborers and more advanced quality of labor. The main purpose of import substitution strategy is to replace the imported goods to domestically produced goods and to establish a more independent national economic structure. The characteristics of the import substitution strategy are the following: (1) It is domestic market-oriented. The market to absorb the products is mainly located in the country, which displays monopoly of the domestic market by national enterprises. However, as they are fully protected by the government, enterprises never compete with foreign rivals and have difficulty exporting the products. (2) They import parts, intermediate products, and machinery and equipment from advanced countries. (3) They develop trade policies which are advantageous for the above purpose. For example, they establish a favorable exchange rate system for machinery import (more appreciated exchange rate than market level) and custom duties (lower custom duties than ordinary level). As mentioned above, the import substitution strategy means introversive industrialized strategy. Ironically enough, import substitution strategy needs independency, but as they cannot produce parts and machineries, etc., they have to be fully dependent on importing them. It points out that the import substitution strategy does not need less import. Less developed countries have, at the beginning stages of industrialization, neither the capacity of producing high quality production goods nor sufficient entrepreneurship. Therefore, they are dependent on the joint venture of domestic enterprises and foreign-owned enterprises. Also, enterprises of advanced countries have incentives to invest

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directly. For example, (1) they want to avoid import restriction measures of less developed countries, and to enjoy monopolistic position of their domestic markets, and (2) also they receive various advantageous measures for foreign investors and the merit of cheap labor forces and cheap land prices. Because of the compatibility for both sides, Asian countries have received very active FDI boom. The Philippines developed the import substitution industrialization strategy whose core was the Philippine zaibatsu and the USA-owned enterprises from the middle of the 1950s. Thailand, which was dependent on primary commodities from the middle of the 19th century, experienced the first industrialization of the country in the middle of the 1960s, while taking the Vietnamese War as an opportunity. It meant that the Vietnamese War caused the inflow of foreign investments into Thailand. Malaysia also started the import substitution industrialization strategy in the middle of the 1960s. Its core industries were textile and electric machinery (the export ratio of such raw materials as tin and natural rubber to the total export gradually decreased). After the four dragons of Asia in the 1970s, at the end of the 1980s, the above three countries and Indonesia were called the four little tigers of Asia. As it is well-known, machinery becomes a substitute for workforce. Thus, the import substitution strategy with development of the capital intensive industry means workforce substitution strategy. For Southeast Asian countries which have redundant labor, the import substitution strategy might make unemployment issues more serious. Large inflowing population from rural areas cannot find any job opportunities at formal sectors in urban areas and have to find jobs at unstable informal sectors like a stallkeeper, day laborer, or repairer which is usually under private management. According to research on the informal sector in Manila’s metropolitan area by the University of the Philippines in 1977, 61 percent of employees were population which moved from outside Manila metropolitan area. The informal sector played a role of safety device for the expanding metropolis. However, income level of the people living there is low and unstable, and their place of residence, the slums, was studded in every corner of the metropolis. People living in the slums of prime cities of less

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developed countries are particularly large in number. For example, at the end of the 1980s, the population ratio of the slums in Bangkok metropolitan area to the total metropolitan population reached 20 percent, 26 percent in Jakarta metropolitan area and 35 percent in Manila (NHK , 1984). The informal sector in the job opportunity sense and the slums phenomena in the living aspect displayed actual circumstances of excessive urbanization (excessive urbanization is a phenomenon which occurred when growth rate of urban population is higher than the expansion rate of urban employment and increasing rate of infrastructure construction like housing, school, road, sanitation facilities, etc.). Poverty in rural areas cannot be resolved by moving population towards urban areas; moreover, the poverty might spread to urban areas. Unemployment problem and income disparity problem are the two sides of a coin. Economic disparity of Southeast Asia might have substantial relations with the import substitution strategy. The strategy to maximize employment is undoubtedly an urgent task to be resolved for less developed countries, which have many redundant workforces. Figure 8.3 depicts the logic in various factors of pitfall (which refers to disadvantageous mechanisms for improving the economy) in Southeast Asia.

6.2. East Asian NIEs model Compared with Southeast Asian countries, why can Asian NIEs countries provide more job opportunities? We think it has close relationships with the export-oriented development strategy. From the middle of the 1960s, Asian NIEs countries and regions have provided subsidies, income tax exemption, and export finance for export oriented companies. Main exportable goods of those days were typical labor intensive products. First, we have a quick look at the Taiwanese situation. At the beginning of the 1950s, Taiwanese economy was restored from the war. However, it faced the shortage of economic resources and foreign exchange. Thus, Taiwanese authorities carried on with import substitution for a few years. After the Taiwanese market was saturated and some

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Excessive urbanization • Turning into a slum • Employment mainly in informal sector • Income and asset disparity

Green revolution; offset the fruits against the population increase: expansion of disparity in rural areas

Capital intensive industry (less job opportunity)

Failure of land reform

External increase of population

Corruption of the privileged classes Deterioration of investment environment: • Economic disorder • Social disturbance

Complexity of racial and religious structure

Occurrence of legitimacy crisis in authoritarian system

Figure 8.3

Instinctive selection (introversive and closed development strategy towards import substitution)

History as a colony

Concept of the pitfall in Southeast Asia

Source: Authors.

industrial production capacities became excessive, the Nationalist Party government submitted a reform plan on foreign exchange and trade policy, and established the investment promotion act. Taiwanese authorities founded three processing export zones concentrating on spinning and electronic industries, and created the export oriented development strategy. In the 1970s, due to the oil crisis, the Chiang Ching-kuo government quickly adjusted the economic development strategy to become the second import substitution strategy, whose great importance was placed on the 10 construction plans, which led Taiwan’s heavy industries to develop. These 10 construction projects have supported contemporary Taiwanese economy. At the same time, Taiwan followed the USA experience, which established the first High-Tech development park (Hsin-Chu Science-based Industrial Park) in the less developed countries. In the development park, electronic information industries have been cumulated which led to the third or fourth rank in production of electronic related products in the world. Market share of more than 10 electronic products has been the highest all over the world.

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Table 8.7 Some indicators on export products of South Korea (1970)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Clothes Household products Wooden products Spinning Textiles Electric products Food industry Rubber products Metal products Steel products Transport machines Machineries Other chemical products Non-iron ore products Chemical fertilizer Non-ferrous metals

Total manufacturing

Export Amount (US$1,000)

Labor Density Coefficient

Relative Wage

232,530 119,499 96,596 50,904 46,772 44,637 44,634 18,016 12,781 9901 9645 7923 7578 6651 6333 5627

0.35 0.35 0.32 0.18 0.31 0.19 0.20 0.28 0.33 0.16 0.15 0.33 0.13 0.23 0.05 0.12

0.67 0.80 0.74 0.76 0.76 1.03 1.09 0.75 0.91 1.36 1.41 0.94 1.29 1.22 1.15 1.13

737,182

0.20

1.00

Source: Economic Planning Board (EPB), Korean Statistical Bulletin, 1970, Seoul. Note: Labor density indicates the workers reward per product, and relative wage shows the ratio of wage of industry concerned to the average.

South Korea had similar development experiences. Table 8.7 shows that, as of 1970, total export amount of the three goods (clothes, wooden products, and household products) occupied 60 percent of the total export amount. Labor density (meaning the workers reward per product) of the three goods shared the top three of all the products. Also, relative wage (the ratio of wage of industry concerned to the average) clearly indicated that those three were low-wage sectors. The labor intensive industry contributed to earning foreign currency as the major industry when South Korea was a redundant workers country and also contributed to increasing job opportunities. Table 8.8 displays the job creation of manufacturing export of some countries in Asian NIEs and Southeast Asia. A indicates the new number of employees created by exports and B points out the total

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Table 8.8 Comparison of employment inducement in manufacturing export of Asian NIEs and Southeast Asia (1975) South Korea

Taiwan

Thailand

Philippines

Japan

A (1,000 workers) B (1,000 workers)

886 2,107

511 1,501

150 1,356

129 1,326

2,265 14,364

A/B

42.05

34.04

11.06

9.37

15.77

Source: Watanabe (1991), p. 91. Note: A indicates number of workers created by exports, and B the total number of workers.

number of employees. With regard to the ratio of A to B, as of 1975, South Korea and Taiwan showed 34.04 percent and 42.05 percent respectively, which was much higher than Thailand (11.06 percent) and the Philippines (9.73 percent). Export industry in Asian NIEs created 30–40 percent of the total job opportunities. Also, this table shows that although Japan is said to be a trading nation, its ratio occupied 15.77 percent which was not so high. Japan, therefore, records large amounts of trade but also has a substantially large domestic demand. In the Asian NIEs countries, the job creation policy (export oriented industrialization strategy) to absorb redundant workers led both to income expansion and success of restraining population explosion (which happened in Southeast Asian countries) as explained by the principles of birth economics. Generally speaking, therefore, we could say that the key of success of the East Asian model in Japan and the East Asian NIEs is shared growth of cooperation between modernization of citizens and modernization of industries (see Figure 8.4).

7. Chinese Way and Chinese Tasks 7.1. Establishment of extroversive market-oriented economy (economic nationalism): Transformation of the initial logic Deng Xiaoping’s policy, which started in 1978, stated the logic of extrovertive market-oriented economy in China. During the days of

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Land reform

Shared growth

Ensuring job opportunities

• income increase • disparity decrease

341

Excessive population in rural areas

Labor intensive industry

Advancement of industrial structure

Export oriented industrialization strategy

Change of population structure

Figure 8.4

Realization of shared growth in East Asian NIEs model

Source: Authors.

the centrally-planned economy, as China was in the vortex of the Cold War and had deteriorating relations with the USSR, China had to attach greater importance on security matters. It was thus the necessary choice to give priority to military and heavy industries. After the 1970s, China preferred détente with the USA in order to compete with the common enemy, the USSR, and established diplomatic relations with Japan. Situation in China radically changed, and economic modernization and improvement of people’s daily life became the country’s main task. Around 15 years of preparations after the Deng Xiaoping strategy started in 1978, the Third Plenary of the 14th Communist Party Meeting held in November 1993 declared the establishment of the socialism market economy system. The term socialism market economy, we think, should be recognized as an expression of a kind of authoritarian system of the Chinese version. The term socialism indicates the political system of one-party control and the term market economy shows the goals of reform which has been transforming. Thus, we could understand that the Chinese development system in the transition period might become the authoritarian system of the East Asian model towards high speed economic growth with the low degree political participation. At the end of the 1970s, important factors to make Chinese development model transform were détente of international situations and

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the existence of civilized and rational leaders like Deng Xiaoping. Basic goals of Deng Xiaoping’s development model were (1) modernization of the national economy (at the end of the 1970s, the four modernizations were presented), (2) promotion of China’s position in international society, and (3) improvement of people’s daily life. Meanwhile, as a short-term goal, social stability was important. Social stability has been an indispensable task when such big countries like China transform the economic system. It was one of the basic reasons for China to employ a gradual way of transition. According to Huntington, when we examine the social stability, the following relations are important whose relations are “social stability = ability of institutional security/degree of social mobility.” The denominator, degree of social mobility, means the degree of growth of peoples’ demand and consciousness. Hierarchy theory of needs by Abraham Maslow classifies the people’s demand into five stages from the low stage to the high stage. When the numerator, ability of institutional security (which points out the institutional providing ability to meet the physical and mental demand of the people) cannot catch up with the degree of growth of people’s demand and consciousness, original balance is lost and social instability occurs. We cannot deny the view saying that in the Deng Xiaoping strategy, there existed contradictions between long-term goals and shortterm goals. Actually, after the reform and open door policy started in China, their social instabilities were experienced. Through the reform and open door policy, much more information becomes available and the degree of social mobility can be rapidly raised. Needless to say, economic development contributes largely to ability of institutional security; however, liberalism and individualism in the market-oriented economy is inconsistent with the authoritarian system. Also, corruption usually accompanied with authoritarian system would damage the government’s confidence and legitimacy. In light of the experiences and lessons of the East Asian NIEs model and the Southeast Asian model, tasks related with China’s transition could be summarized as the following two: (1) In the economic aspect, can China realize shared growth? Is it impossible for China to be caught in the pitfall of Southeast Asia? (2) In the political aspect,

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could China improve the symbol of rational authoritarianism (technocrats group)? According to Taiwanese experience which accomplished one-party control, it undoubtedly depends on civilized leaders and reform of party administration. We investigate the above two tasks in the following section.

7.2. Is it impossible for China to be caught in the pitfall of Southeast Asia? As mentioned earlier, legitimate bases of the authoritarian system are high speed economic growth and shared growth. We think that, when China accomplishes high speed economic growth, it might be dangerous to be caught in the pitfall of Southeast Asia, because (1) there are differences between the ratio of productive industrialization and labor force industrialization. Due to the difference, many workers cannot enjoy their industrialization and benefits of economic growth. Unless the situation is changed, the difference between them might expand. Also (2) land reform in China is halfway through, although land reform in rural areas is an effective measure to break away from poverty. In order to resolve the present, three agricultural problems (agriculture, rural areas and peasants), further policies of land reform are necessary in addition to promotion policies towards non-farming jobs for redundant workers in rural areas. 7.2.1. The difference between the ratio of productive industrialization and labor force industrialization Table 8.9 shows the ratio of urbanization (which indicates the ratio of the population in urban areas to total population, both are population with household register) in China. China’s ratio of urbanization increased to 42.99 percent in 2005 from 17.9 percent in 1978. Since 1999, urbanization has been accelerated to be raised by 9.1 percent for the seven years, by the tendency of which they expect that China’s ratio of urbanization will reach 65 percent in 2020. As pointed out in Table 8.10, the ratio of labor force industrialization was much less than the ratio of productive industrialization.

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Transition, Regional Development and Globalization Table 8.9 The ratio of urbanization in China (100,000, percent)

Total Population (end of the year) 1978 1980 1985 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

96,259 98,705 105,851 112,704 114,333 115,823 117,171 118,517 119,850 121,121 122,389 123,626 124,761 125,786 126,743 127,627 128,453 129,227 129,988 130,756

Population in Urban Areas

Population in Rural Areas

Number

Ratio

Number

Ratio

17,245 19,140 25,094 29,540 30,195 31,203 32,175 33,173 34,169 35,174 37,304 39,449 41,608 43,748 45,906 48,064 50,212 52,376 54,283 56,212

17.92 19.39 23.71 26.21 26.41 26.94 27.46 27.99 28.51 29.04 30.48 31.91 33.35 34.78 36.22 37.66 39.09 40.53 41.76 42.99

79,014 79,565 80,757 83,164 84,138 84,620 84,996 85,344 85,681 85,947 85,085 84,177 83,153 82,038 80,837 79,563 78,241 76,851 75,705 74,544

82.08 80.61 76.29 73.79 73.59 73.06 72.54 72.01 71.49 70.96 69.52 68.09 66.65 65.22 63.78 62.34 60.91 59.47 58.24 57.01

Source: Chinese Statistical Bulletin, 2004 and 2006.

As of 2005, 23.8 percent of workforce produced 47.5 percent of total production. This ratio was however calculated by population of household register, and as a matter of fact, redundant workers in China’s rural areas have started to move to urban areas. The fifth national population census in 2000 indicated that mobility population in China equaled to 121,070,000 in which mobility population within province displayed 78,650,000 and across province 42,420,000. Most provinces which have large number of outflow of population are located in inland regions. Particularly for provinces such as Henan, Sichuan, Shandong, and Anhui, workforce outflow has been one of the main industries.

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Table 8.10 Comparisons of labor force industrialization with productive industrialization in China (percent) Structure of Employment

1952 1957 1962 1965 1970 1975 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

GDP Structure

Agriculture

Industry

Services

Agriculture

Industry

Services

83.5 81.2 82.1 81.6 80.8 77.2 70.5 69.8 68.7 68.1 68.1 67.1 64 62.4 60.9 60 59.3 60.1 60.1 59.7 58.5 56.4 54.3 52.2 50.5 49.9 49.8 50.1 50 50 50 49.1 46.9 44.8

7.4 9 8 8.4 10.2 13.5 17.3 17.6 18.2 18.3 18.4 18.7 19.9 20.8 21.9 22.2 22.4 21.6 21.4 21.4 21.7 22.4 22.7 23 23.5 23.7 23.5 23 22.5 22.3 21.4 21.6 22.5 23.8

9.1 9.8 9.9 10 9 9.3 12.2 12.6 13.1 13.6 13.5 14.2 16.1 16.8 17.2 17.8 18.3 18.3 18.5 18.9 19.8 21.2 23 24.8 26 26.4 26.7 26.9 27.5 27.7 28.6 29.3 30.6 31.4

50.5 40.3 39.4 37.9 35.2 32.4 27.94 30.99 29.91 31.60 33.09 32.88 31.85 28.19 26.90 26.57 25.47 24.88 26.88 24.28 21.54 19.49 19.64 19.77 19.51 18.06 17.32 16.22 14.83 14.15 13.49 12.57 13.11 12.60

20.9 29.7 31.3 35.1 40.5 45.7 47.88 47.10 48.22 46.11 44.77 44.38 43.09 42.89 43.72 43.54 43.79 42.93 41.34 41.79 43.45 46.57 46.57 47.18 47.54 47.54 46.21 45.76 45.92 45.15 44.79 45.97 46.23 47.50

28.6 30.1 29.3 27 24.3 21.9 24.19 21.91 21.87 22.29 22.14 22.74 25.07 28.92 29.38 29.88 30.74 32.19 31.78 33.93 35.00 33.94 33.78 33.04 32.95 34.40 36.47 38.02 39.25 40.70 41.72 41.44 40.67 39.90

Source: Chinese Statistical Bulletin, 2006.

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The main destination for outflow population has been big cities located in coastal regions. Beijing received more than three million and Shanghai more than four million redundant population. According to the calculation of China Research Centre on Small Towns in China, there are more than 270 million redundant workforces in China’s rural areas, who are looking for non-farming jobs. We have no statistics on employment situation in urban areas of outflow workforces from rural areas; however, we easily expect the following. (1) Stable growth of industry sectors suggests that a fairly large number of outflow population work in factories. They strongly contribute to China’s factories all over the world and are usually enforced low wages and low social security. Needless to say, there are some people who learn labor skills and raise their careers to be engineers. Also, there are some people who return to their hometowns after enough training to be entrepreneurs. There have never been big-scale slums in China’s urban areas, which expresses that industry sector gives job opportunities for outflow population from rural areas (China’s industry and construction sector provides housing to the workers). (2) Meanwhile, in China’s urban areas, there are insufficient jobs for regular employees to redundant workers in rural areas. Some mobility population from rural areas work as day laborers and stallkeepers. Especially, there are many people of middle age and many women working for fast-food restaurants, stallkeepers, tricycle services, etc. These situations are testified to some extent by the situation in Shanghai. Research on the mobility population at the fifth population census in Shanghai in 2000 pointed out that outflow population in the whole city reached 3.87 million in which people with household register in rural areas were the largest at 85.3 percent. Of the reasons to reach Shanghai, to engage in economic activities was the most popular which shared 73.6 percent with 2.8 million (see Table 8.11). According to Table 8.11, manufacturing (25.9 percent) and commercial service (27.4 percent) had the largest share. The total of manufacturing and construction shared 45.4 percent. Commercial service means a fast-food restaurant managed by family and stallkeepers, etc.

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Table 8.11 Job structure of mobility population in Shanghai (100,000; percent)

Technical skill Clerical work Commercial service Agriculture, forestry and fishery Manufacturing Construction Others Total

Number

Ratio

10.77 1.54 77.89 20.74 73.47 55.53 44.35

3.8 0.5 27.4 7.3 25.9 19.5 15.6

284.28

100

Source: Chen Yingfang (2006).

The clerical work occupied only 0.5 percent, who seemed to move from other cities. As stated above, in China, population mobility has been very active between urban and rural, and between industries. Then what are the problems that have occurred with the mobility? (1) Some barriers against population mobility At present in China, when peasants mobilize between regions, they have to overcome three barriers which are household register system, economic cost, and mental cost. Household register system has eased recently and they easily purchase daily provisions, daily necessities, etc., at the market. However, barriers which accompany the household register system such as education and social welfare have deeply remained in all regions. Each city (municipality) has a system to receive mobility population from rural areas for economic development; however, they are still a long way from equal treatment. We have much information about mental distress of mobility population, and various sad events have been reported by the mass media. For example, suicide of workers from rural areas because of non-payment of wages has occurred rather often. Many prostitution houses have been found near construction sites. Schools for children of farming

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population which they voluntarily established were ordered to be removed by local governments because the schools could not meet basic conditions. Nobody could take care of aged parents who stayed in rural areas and nobody knew the aged parents who died from natural causes. (2) Reasons for increased redundant population in rural areas Table 8.9 shows that in 1980, 68.7 percent of all workers were occupied by the agricultural sector. Why were such huge number of redundant population accumulated in rural areas before the Deng Xiaoping strategy? The reasons seemed to be the following two. First, at the end of the 1950s, arable land in China reached the limit. Because of low productivity in agriculture, increased labor input was necessary for increased production. However, some redundant workers worked for commune farming companies (which were the forerunner of TVEs). Such commune farming companies provided simple production goods for agriculture and were embodied with the way of self-reliance. Second, because first priority was given to national security, military industry development became the central target and modernization of human resources was never the target of nation building. Three major institutions (household register system, unification of foodstuff purchase and sale, and national regulation system on employment) were established and free mobility of workers was prohibited. At the end of 1956, reform movement to public-owned property rights was completed and public property rights were established in China. Most enterprises thus became state-owned and collective-owned. The separation system of agriculture and industry was established by formerly implementing the household register system in 1958. Ironically, although the dialectic which occupied important positions in the Mao Zedong ideology is a philosophy advocating universal relations among things and phenomena, the philosophy was not applied to the relations between agriculture and industry in central planning of China. As a matter of fact, in 1956 Mao Zedong

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presented the well-known article entitled “Ten Important Relations,” in which Mao Zedong indicated cooperative relations between agriculture and industry as an important relation in the national economy and social development. Unfortunately, however, such relations were not actually realized in the logic of central planning. Centrally-planned economies have similar characteristics with war-time economies and they may not be sustainable. Heavy industries led development strategy, which enforced hard burdens on peasants and rural areas, extended the distortion of national economy and social structure. Thirty years after its beginning, the system ended. In contemporary China, it has been recognized that building the cooperative development strategy between agriculture and industry is very important. Also when it is built, they have to attach greater importance to modernization of the population. In order to realize the modernization of the population, deregulation on labor mobility is indispensable. Besides, we think that employment promotion policies are also important tasks. 7.2.2. Tasks on land reform in China Without overcoming the three agricultural problems, it might be impossible for industrialization in China to be successful. We should recognize also that, when the three agricultural problems are attempted to be resolved, not only employment promotion policies for nonagricultural sectors in rural areas but also land reform policies are crucial. Industry and agriculture are interdependent on each other, and modernization of agriculture and modernization of industry also have a relationship like a twin. Raising productivity in agriculture makes it possible to save labor force and land which can be provided for industrial use. Also, developing industries can allocate more machineries, chemical fertilizers and agricultural chemicals, etc., into agriculture. Industry and agriculture thus are promoted interdependently. In post-war Japan, Taiwan, and South Korea, land reform was carried out and advantageous external

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circumstances for industrialization were established. With regard to the Taiwanese case, the ratio of peasants without land was successfully reduced to less than 10 percent, which became the base for shared growth. In the Taiwanese case, after the land reform, the ratio of landed peasants to the whole peasants substantially increased, which reached 51.8 percent in 1953, 65.7 percent in 1963, and 84.7 percent in 1979, although before the land reform the ratio was only 26.2 percent. Meanwhile, both the ratios of half-landed peasants and of peasants without land sharply declined, and also landowners with more than average level nearly diminished (Li, 2004, p. 247). The land reform in Taiwan which was from the end of the 1940s to the beginning of the 1950s, however, was implemented moderately and gradually with three separate stages. The land area which landowners could hold (about three hectares) was around three times more than average arable land area occupied by ordinary peasant (about one hectare) (Dong et al., 1999, p. 36). The success of land reform caused various considerable repercussions, which established the base (social, economic and political base for the authoritarian development system) for shared growth realized later in Taiwan (see the following literatures, Li, 1996; Lin, 2001; Huang, 1991; Li and Li, 1992; and Yang, 2001). They are, for example: (1) labor incentive for peasants was increased so high that high speed growth rate of agricultural production recorded expansion of production for 16 consecutive years from 1953 to 1968 (whose annual average growth rate reached 5.2 percent) was realized because of the land reforms. (2) Due to the structural changes of rural society, the base for political support became more firm. The land reform played the role similar with the substitution of revolution and the peasants were replaced from potential revolutionary power to basic social conservative power as insisted by Huntington (1968). (3) We could recognize the light of wisdom of people to design the institution by observing wise transformation from agricultural capital to industry and commercial capital, which was, we think substantially contributed by Nong Fu Hui (meaning the association for agricultural restoration), the USA aid organization.

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Meanwhile, although Southeast Asia succeeded with the assistance of international societies in the 1960s and 1970s,7 because of delayed land reform, disparity among social strata became more serious. In aspects such as finance, market share, tax revenue, public service, etc., big landowners have more advantages than tenant peasants. In the countries without successful land reform, there have existed powerful interest groups like landowners and they have controlled effectively not only land policies but also various economic policies to be advantageous for them. It can be said that the land reform policy at the early stages of post-war period was a touchstone of ability of policy measures for the countries concerned. Arable land is the only producers’ goods for majority of China’s peasants. However, is land really an asset of Chinese peasants? The answer could be negative. We look at the land policies from three viewpoints: (1) current land requisitioned policy, (2) asset value of land, and (3) possibility of land privatization. (1) Negative effects of current land requisitioned system On 1 March 2002, the Land Contract Law of the People’s Republic of China came into effect. With the law, peasants have the right to use land, the right to manage land, the right to have earnings, and to transfer the right to use land, for the first time in the legal sense. However, in the process of urbanization accompanied with land requisition, the asset rights on land of peasants have never been actually admitted. The legal base of the current way of land requisition is the Land Control Act of 1998, which might however be used to exclude peasants’ rights. There are several laws related to land in China, which, for example, include the Constitution of People’s Republic of China (which had the fourth revision in 2004), the Agricultural Act (which was set up in July 1993 and revised in 2002), the Land Control Act

7

In the second half of the 1960s, the IRRI (International Rice Research Institute) founded by the Rockefeller Foundation and the Ford Foundation succeeded in the improvement of a species, HYV, meaning high crops. After this, the rice producing areas in Asia were introduced to the HYV to raise productivity. In addition to rice, wheat was also an improved species.

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(which was established in 1998), the Enforcement Ordinance of Land Control Act (which was implemented on 1 January 1999), and the Peasants Committee Organization Act (which was set up in 1998). The above-mentioned constitution and acts spelled out that farm land is collectively owned by peasants, based on which, when land is requisitioned, it is resold to the local lower rank government as public asset. Legal ambiguity of land asset rights might become institutional reasons which damage peasants’ rights and interests. According to the joint research carried out by the Secretariat of Central Supervising Group for the Chinese Agricultural Policy and Ministry of National Land and Resources, through current system for compensation (meaning land compensation cost, planting compensation cost, workforce outflow compensation cost, etc.), the amount of compensation money for peasants reach around 10,000 yuan per mu (Chinese unit l area one mu is equal to 6.667 acres), and with regard to land requisition for infrastructure construction like railway and road (public interests), the amount of compensation money would become much less, around only 5,000–8,000 yuan per mu.8 The most serious problems regarding land requisition system are as follows: (1) area becomes too large (reflecting development boom) and arable land destruction becomes remarkable; (2) amount of compensation money for land requisition is too small to protect peasants’ rights and interests; (3) such policy supports as mobility, non-agricultural job opportunities and social security policies for peasants who lose their lands are not enough; (4) because the policies are led by administration, illegal procedures of land requisition are universally acknowledged and no right to know, no right to participate, and no right to make an objection is secured. Any problems mentioned above are caused by the local government’s activity to maximize their self-interest. For example, the Formula One Race Circuit established at Jiading district in Shanghai. Its construction was started on 17 October 2002, and in the first 8

The Office of the Central Commission of Supervising Group for Chinese Agricultural Policy and the Ministry of Land and Resources (2002), which carried out a special investigation for the 16th National Meeting of Communist Party. Also see Xinhua website.

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stage it occupied a land area of 2.5 square kilometers. Even if this was the land for commercial use, local government ordered land requisition from peasants and sold the land to Shanghai International Race Circuit Ltd., for an extremely low price of 152.1 thousand yuan per mu. It shows that local governments exclusively authorize the public interest and no right to know, no right to participate, and no right to make an objection is secured. The compensation cost for land requisition of the seventh land at the same area of Juyuan at the Jiading district equaled to 250,000 yuan per mu, and the contract price at the auction in September 2003 reached 1.2 million yuan per mu (contracted by Shanghai Sansheng Real Estate Company). The local government easily gained 950,000 yuan profit per mu. Moreover, peasants living there did not know the fact that their lands where they lived had already been sold. They knew it for the first time just when they had to move, and they protested.9 In the revision of the Constitution in 2004, Article 10 was revised to say that the nation can put land (meaning collectively owned land of rural areas and state-owned land of urban areas) in requisition for public interests and grant compensation for it. Although it strongly emphasizes “public interests” and “compensation,” actual procedures in land requisition were often carried out illegally anywhere which was rebelled by people in rural and urban areas. In April 2007, “the worst case of Dingzihu10 eviction rejected family, in history” happened in Chongqing which was sensationally reported by the media both abroad and in China was symbolically meaningful (see Photo 8.1). With regard to the case in Chongqing, although it would be difficult to say who was responsible, it would be easy to say that the legal system has been substantially delayed to be well established. Any governments, any citizens, and any developers have their self-interest, but when establishment of legal system is remarkably delayed, the situation would become greatly disrupted, which might lead to a vicious circle. As a matter of fact, since 1999, 9

According to the author’s interview at Jiading district in Shanghai. Dingzihu indicates the family which does not agree with developers on the conditions of requisition and of staying there.

10

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Photo 8.1 Actual situation of “the worst case of Dingzihu, eviction rejected family, in history” Note: The person who took this photo seemed to be a citizen of Chongqing, and the photo was prevalent in the Internet starting from Chongqing in February 2007. The situation was as follows; In order to implement a certain commercial facility development project located at the center of Chongqing, local government started to remove the citizens from that area. However, even three years after they began, they could not reach agreement of the negotiation with the family of shop owner (whose shop was located at Jiulongban district, Hexing Road), a married couple named Yang Wu and Wu Ping. Thus, the three-story shop (with housing) was changed into an “island” surrounded by a moat of 10 meters in deep and they continued to confront each other. On 19 March, three days after the real right law was signed, China’s Central TV Broadcasting Station reported the progress of this case in the program, Chinese Constitutional State Report. When the media, both abroad and in China paid attention, at the beginning of April the case was finally completed. The married couple entered into a contract on the condition that they would receive the shop with the same area at the center of Chongqing.

complicated cases caused by requisition accompanied with urban redevelopment have become aggravated. Self-immolation was the most violent incident which took place. Such a serious social situation, we think, has led to the revision of the Constitution in 2004 (the fourth

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revision of the 1982 Constitution) and also to establish the real right law in March 2007 (the draft of which was started to be prepared in 1998). (2) Peasant’s land is not a living asset Peasant’s land has ambiguous provision of collective property rights. It has the danger of being taken by force anytime and also it cannot be used as security to bank loan, thus it has no actual asset value. At the same time, it is prohibited institutionally to be sold for residential use. Peasants have no initial asset in a market-oriented society. They have only one way to change their circumstances in rural areas, which is to move to urban areas to find work. Discussions of pros and cons of reform plans of land in rural areas has been going on for a long time. Particularly, it has been argued that the contract land for peasants could be used as security to bank loan and farm land could be allowed to be sold for residential use. The Real Right Act of the People’s Republic of China which was signed in March 2007 gave no permission for the above two. The deputy chair of the legal committee of the National Parliament, Hu Kangsheng, explained the reason that financial problems of peasants should be resolved by establishing sound financial service in rural areas (Xinhua website (http://www.xinhuanet.com), 22 August 2006). China being an agricultural country, it is reasonable to say that land reform is an important task to be adjusted carefully. However, if such current situation continues for a long time, farm land cannot be useful for improvement of peasants’ circumstances. On the contrary, farm land is illegally taken by force in the expansion process of urban areas, which has led to wider disparity between urban and rural areas. (3) Possibility of land privatization Since the beginning of the 21st century, along with the progress of urbanization, farm land was destroyed and food production decreased. Such crises gave an opportunity for Chinese people to think about land reform. At the end of 2004, a big agricultural

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province, Anhui province carried out a questionnaire to survey on the land privatization, which was intended for altogether 2,070 farming families living in 15 cities, 60 counties and districts, 219 towns and villages, of the province. Its results showed that 46.09 percent farming families were against land privatization, 28.7 percent farming families were for it, and others were “indifferent” or “without knowledge” (Xinhua web site (http://www.xinhuanet.com), 28 December 2004). No advanced country in the process of modernization implements a collective-owned land system in rural areas. What are the problems that hinder land privatization in China? Views of the opponents are generally as follows. First, in order to implement land privatization, it is indispensable to carefully consider differences among land quality and to decide family population to fairly allocate the land. It is questionable if lowest rank executives of rural areas can maintain fairness in the procedure. Second, security is more important than efficiency. In China, total population equaled to 1.3 billion in 2002 whose per capita arable land reached only 1.2 mu. Moreover, as population is distributed with imbalance, per capita arable land in one-third of provinces and cities does not reach one mu. In 666 counties, it is less than 0.8 mu, and in 463 counties it is less than the dangerous line of 0.5 mu. In the present situation in China, with regard to immature social security system, farm land is an important material to meet basic living necessities which should not be viewed from efficiency. If farm land is privatized and if parents have to part with the land due to gambling debts, etc., what would their children do? Third, when privatization is advanced, it is necessary that largescale landowners come into existence. That makes income disparity expanded. Fourth, a land cooperative organization system can improve transfer of the rights to use. At present, the right to use of contracted land can be transferred (with conditions of maintaining agricultural land, within the period of remaining years in the 30 contracted years). According to the regulation, concrete conditions of transfer are decided by peasants and peasants can get the revenue. However, when peasants wish to transfer the land to others due to movement to urban

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areas to find work, it is difficult to find partners (like other peasants and agricultural companies) by an individual peasant and to secure the rights and interests. Thus, the idea of establishing an organization like land cooperative organization system to mediate to transfer the rights to use came into existence. In order to improve the idea, establishment of the cooperative economic act in farm land was necessary. When the above-stated questionnaire survey in Anhui province was conducted, 55.75 percent of the peasants were for establishing land cooperative organization by selecting their representatives in a democratic way. On the contrary, some scholars have advocated land privatization in rural areas when progresses such as market-oriented economy, privatization, and institutional reforms on asset property rights of stateowned enterprises have been improved. Kuai Zheyuan, the chief of the Chinese Research Center for National Economy, has been one of the representatives. He insisted on the following assertions when he was interviewed (Ji, 2005). The first assertion was about efficiency of land use. The peasant economy under the contract system has never efficiently allocated land resources. Due to ambiguous property rights, peasants do not take care of the land carefully. Also due to low productivity, some portions of lands have gone to ruin (as peasants went to urban areas to find work). Privatization makes large-scale farms possible, the efficiency of which becomes higher. Some peasants who part with the land are absorbed by urbanization and industrialization. To make land use more efficient, an unambiguous property rights of land is required. Second, because peasants have no property rights, when land is requisitioned they cannot have influential voices, and they cannot stop local governments from illegal activities. Through land privatization, peasants can get the profit when land prices increase and they can also hinder irregular taken by public authority. Third assertion was about the fictitious existence of collective property rights of land. Collectively owned farm land (and land located in suburban areas) has limited rights to carry out land management collectively. For example, selling land is undoubtedly prohibited and to have contract with organizations and individuals except collective organizations needs the consent of more than two-thirds of peasants

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or representatives of peasants and also needs permission by town and village governments. Due to incomplete authority on land of individual peasants and collectives, revenues from land are received by some governmental sections to maximize their self-interests. Fourth assertion was on the meaningful effects of reform on urban areas. Economies in urban areas have been active mainly due to privatization. We think that a similar mechanism might be necessary in rural areas to thoroughly resolve the three agricultural problems. Although policy measures after 2005 such as abolishing agricultural tax and providing subsidies to peasants contribute to agricultural promotions, the three agricultural problems cannot be radically solved. As indicated above, few experts are opposed to farm land privatization from viewpoints of ideology. Opponents’ views are concentrated on side-effects or the extensive preparations when such radical reforms are carried out. To be sure, from the view of political party system, although they are just friendly parties to maximize their self-interest, indispensable existence of party management has been the change of institutional environments to provide norms to party activities like the Political Party Act. Similarly, when land privatization progresses, such institutional environment might be necessary. It should be noted that careless implementation of land privatization will cause the above-stated side-effects. Side-effects should not hinder institutional construction. International experiences like the Taiwanese lesson of land reforms and historical perspectives in China surely seem to give some helpful suggestions. The reform and open door policy in China led by Deng Xiaoping, which started in 1978, was much more difficult to be carried out than nowadays. 7.2.3. Conclusion: The future of the three agricultural policies towards shared growth The Chinese development strategy was based on the labor intensive type as shown in the Guangdong Model and the Jiangzhe Model in the 1980s. Also, the “Big Cycle of International Economy” discussion in 1988 came into existence as an extension of the idea. After the 1990s, the High-Tech industrial development zones were established one after

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another all over China, attaching greater importance on High-Tech industry from viewpoints of industrial policy. The ratio of High-Tech products to total export products has steadily increased. As the reciprocal demand between the light industries and the heavy industries, has been recognized remarkable development of the light industries in the 1980s caused the development of heavy industries. Actually, the ratio of heavy industry production to GDP increased after 2000. Heavy industry development seemed to be closely related with reformation and promotion of state-owned enterprises, which was accelerated from the second half of the 1990s. Also in China, many redundant workers in rural areas had to be moved. Taking into consideration the Chinese population structure, in terms of both quality and quantity, non-agricultural employment promotion policies have been crucial political tasks. It seems to be indispensable to find some organizations to take responsibility for non-agricultural job opportunities in rural areas (like TVEs) and to expand job opportunities in formal sectors in urban areas. We think, from current situation which has large number of restructuring of unemployed workers, employment promotion policies have difficult tasks to be resolved. It is also necessary to have policy measures to change peasant’s attitude from passive to positive. For example, peasant’s autonomous attitude could be created by land reform, and peasants should be given the right to organize (to establish self-reliant organization like an agricultural cooperative) and the right to represent (to have seats of agricultural representative in the correct sense in national and local parliament). Such measures mean institutional security to defend peasants from infringing on their rights, which we think leads to carry out the local autonomous system in a constitutional sense.

7.3. Relations between party and administration and transforming bureaucrats group in transition period Centrally-planned economic system has a leading ideology, in which a leader is considered a kind of almighty. Highly centralized system in

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political aspect covers the economic aspect, which produces stateowned enterprises, a unified government and companies. The division of labor theory insisted by Adam Smith emphasizes efficiency improvement by division of labor. We think the idea could be applied to the field of social management. In order to manage a society, which has become a complicated system efficiently, it is indispensable to establish a system of division of labor and cooperation not to establish an almighty system. After 1978, transition towards an open market-oriented system has caused the Chinese society and economy to be a division of labor system. Separation of government from enterprises, meaning reform of state-owned enterprises, has steadily been carried out. Division of labor in market necessarily needs division of labor in political and administration aspect, which will let separation of party and administration come up to the surface as a serious task. The separation of party and administration in China has been a task to be examined for a long time since the 1980s. However, in the 1980s, although it was recognized as an ideology requiring the separation of party and administration, because economy and society was not developed enough, the task had no reality and urgency. Such social and economic circumstances contributed to party executives with royalty to keep their power. We think that it is not necessary to emphasize the separation of party and administration in an organizational and functional sense. From the lesson of Taiwanese history on the separation of party and administration, we think it is indispensable to have transformation of the logic arising from external environment. China’s failure on the separation of party and administration until the 1990s was surely without the transformation. Meanwhile, after 1999, based on events such as acceleration of urbanization, real estate boom, and China’s participation in the WTO, China’s needs of experts in social and economic management have rapidly increased. It should have occurred that the position of technocrats and party executives of the nation will be reversed. The bureaucrat system in China has been experiencing a peaceful revolution. Generally speaking, in the transformation process, it is important to heed the necessary circumstances. As a matter of fact,

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in the gradual reformation of China, such a way of fact following mechanism of institutional change has been followed. With regard to the characteristics of the bureaucrats group in China after Deng Xiaoping’s reform in 1978, China has still been in the days of technocrats with science and engineering. However, significant change could be recognized, which says that traditional technocrats in science and engineering have been remarkably replaced by bureaucrats in economy and finance since the end of the 1990s (especially at the Sixteenth National Communist Party Meeting in 2002). We expect the remarkable tendency cannot be reversed. We investigate the expression, reasons, and new direction regarding the tendency. 7.3.1. The days a country was ruled by engineers Before the end of the 1990s, China can be called as a country ruled by engineers. The characteristics of the days was that, it was easier for technocrats with science and engineering backgrounds to promote their positions to the top from the bottom. Most of the technocrats have studied in former socialist countries such as the USSR, GDR, and Czechoslovakia, and have the academic background of graduating from distinguished universities in science and engineering in China. Table 8.11 shows universities (educational level and special subject) from which they (meaning Prime Minister, VicePrime Minister, State Committee, High Ranking Government Officials of Administrative Vice-Minister level, at the Sixth, Seventh and Eighth National Parliament, and till the end of March 1996) graduated. Before examining Table 8.12, we have a short look at structures of the central organizational system of the Communist Party and the administrative system of the People’s Republic of China. Figure 8.5 indicates the central organizational system of the Communist Party. (1) In the National Communist Party, members of each committee are selected, which is the Central Committee of the Chinese Communist Party (which consists of committee and candidate committee, within which, the principle of democratic concentration

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Prime Prime Prime Prime Minister, Minister, Minister, Minister, Vice-prime Economy Vice-prime Economy Vice-prime Economy Vice-prime Economy Minister, and Minister, and Minister, and Minister, and State Industry National State Industry National State Industry National State Industry National Committee Section Others Total Committee Section Others Total Committee Section Others Total Committee Section Others Total

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USSR (studying abroad) GDR (studying abroad) Czechoslovakia (studying abroad) Tsinghua University Renmin University of China Peking University University of Finance and Economics Foreign Affairs College

First Meeting of the Sixth National Parliament (1983.6)

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University, Vocational College, etc.

First Meeting of the Seventh National Parliament (1988.3)

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First Meeting of the Eighth National Parliament (1993.3)

At the End of March 1996

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Table 8.12 Number of graduates of universities (prime minister, vice-prime minister, state committee, chairperson, ministers)

First Meeting of the Eighth National Parliament (1993.3)

At the End of March 1996

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Prime Prime Prime Prime Minister, Minister, Minister, Minister, Vice-prime Economy Vice-prime Economy Vice-prime Economy Vice-prime Economy Minister, and Minister, and Minister, and Minister, and State Industry National State Industry National State Industry National State Industry National Committee Section Others Total Committee Section Others Total Committee Section Others Total Committee Section Others Total

363

Beijing Vocational School of Economics Beijing University of Mining and Technology Beijing Iron and Steel Engineering Institute Beijing Petroleum Institute Beijing Agricultural Machinery and Chemical Institute Beijing Institute of Posts and Telecommunications

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University, Vocational College, etc.

First Meeting of the Seventh National Parliament (1988.3)

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Table 8.12 (Continued )

Prime Prime Prime Prime Minister, Minister, Minister, Minister, Vice-prime Economy Vice-prime Economy Vice-prime Economy Vice-prime Economy Minister, and Minister, and Minister, and Minister, and State Industry National State Industry National State Industry National State Industry National Committee Section Others Total Committee Section Others Total Committee Section Others Total Committee Section Others Total 1

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Beijing Aeronautical and Astronautical Institute Nankai University North China University Zhangjiakou Industrial Junior College Shenyang Mechanical and Electrical Engineering Junior College

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University, Vocational College, etc.

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At the End of March 1996

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Table 8.12 (Continued )

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Prime Prime Prime Prime Minister, Minister, Minister, Minister, Vice-prime Economy Vice-prime Economy Vice-prime Economy Vice-prime Economy Minister, and Minister, and Minister, and Minister, and State Industry National State Industry National State Industry National State Industry National Committee Section Others Total Committee Section Others Total Committee Section Others Total Committee Section Others Total

365

Shenyang Institute of Light Industry (Junior College) North-East Railway Institute Dalian Maritime University Dalian Technical Institute Harbin Institute of Technology Harbin Foreign Languages University Fudan University

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University, Vocational College, etc.

First Meeting of the Seventh National Parliament (1988.3)

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Table 8.12 (Continued )

Prime Prime Prime Prime Minister, Minister, Minister, Minister, Vice-prime Economy Vice-prime Economy Vice-prime Economy Vice-prime Economy Minister, and Minister, and Minister, and Minister, and State Industry National State Industry National State Industry National State Industry National Committee Section Others Total Committee Section Others Total Committee Section Others Total Committee Section Others Total 1

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Shanghai Shipping College Shanghai Second Medical University Shanghai Jiaotong University Tatong University Nanjing University Nanjing Military Institute Nanjing Geological School Anhui Agricultural College

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University, Vocational College, etc.

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Table 8.12 (Continued )

Prime Prime Prime Prime Minister, Minister, Minister, Minister, Vice-prime Economy Vice-prime Economy Vice-prime Economy Vice-prime Economy Minister, and Minister, and Minister, and Minister, and State Industry National State Industry National State Industry National State Industry National Committee Section Others Total Committee Section Others Total Committee Section Others Total Committee Section Others Total 1

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Shandong Institute of Technology Beijing Language & Culture University East China Textile College China Textile University Zhongshan University FrancoChinoise de Lyon Jinan University Guangxi University

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University, Vocational College, etc.

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First Meeting of the Eighth National Parliament (1993.3)

At the End of March 1996

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Table 8.12 (Continued )

Prime Prime Prime Prime Minister, Minister, Minister, Minister, Vice-prime Economy Vice-prime Economy Vice-prime Economy Vice-prime Economy Minister, and Minister, and Minister, and Minister, and State Industry National State Industry National State Industry National State Industry National Committee Section Others Total Committee Section Others Total Committee Section Others Total Committee Section Others Total 1

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Chongqing Institute of Architecture and Engineering South-West Associated University Yanan University Chinese Resisting Japanese Aggression University of Military and Politics

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University, Vocational College, etc.

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At the End of March 1996

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Table 8.12 (Continued )

Prime Prime Prime Prime Minister, Minister, Minister, Minister, Vice-prime Economy Vice-prime Economy Vice-prime Economy Vice-prime Economy Minister, and Minister, and Minister, and Minister, and State Industry National State Industry National State Industry National State Industry National Committee Section Others Total Committee Section Others Total Committee Section Others Total Committee Section Others Total 1

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Source: Mitsubishi Research Institute (ed.) (1996), pp. 56–57. Note: “Study abroad” includes practice at the factories, and the “graduates of university” includes those who quit university and those taking a correspondence course. Blank means he or she never entered university or vocational college. The number of people is the same in the source indicates.

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Xinjiang Agricultural Institute Local normal school Correspond to junior college students None

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University, Vocational College, etc.

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Table 8.12 (Continued )

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Direction Central Committee for Discipline and Supervision

Central Committee of the Chinese Communist Party (consists of committee and candidate for committee; attainment of the principle of democratic concentration)

Secretary General Selection Selection Executive Committee of Central Political Bureau

National Party Meeting

Selection Central Military Committee of the Chinese Communist Party

Selection Central Political Bureau Central Advisory Committee (1982–1992)

Central Secretary Office (administration organization)

Various organizations under the direct control of the Central Committee of the Chinese Communist Party

Figure 8.5

Central organization system of the Chinese Communist Party

Source: Authors.

system is accomplished), the Central Committee of Inspection of Discipline, the Central Advisor Committee. (2) In the Central Committee of Chinese Communist Party, when the National Party Meeting is closed, the Highest Leaders Organization select members of the Central Military Committee of the Communist Party, which indicates that the party fully controls military forces. In the administration system of the PRC, they have another Central Military Committee of PRC. They do not contradict because their members are the same. (3) When the Central Meeting of Political Bureau is closed, state committee implements the authority. (4) Central Committee of Inspection of Discipline carries out the policy measures led by the Central Committee, and it has the authority to control the activities of lower rank Committee of Inspection of Discipline. (5) The Central Advisor Committee existed for 10 years from 1982 to 1992. Its roles were assisting and advising political activities of the Central Committee. Members of the committee were chosen from party members who have 40 years experience as party members, enough experience for a leader’s activities, and receive confidence of the people regardless of the party. After Deng Xiaoping’s reform, Deng established this committee which took the responsibility for the

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Cabinet (State Council) (consists of Prime Minister, vice Prime Minister, State Councilor, General Secretary)

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Figure 8.6

Organizational system of the Chinese cabinet

Source: Author.

retired party executives to be replaced by younger executives but this was abolished in 1992. Meanwhile, Figure 8.6 shows the organizational system of the cabinet. (1) The cabinet consisted of Prime Minister, Vice-Prime Minister, State Councilor, and General Secretary. (2) state councilor is a newly established position according to the 1982 Constitution, who is a cabinet minister with the same rank as the Deputy Vice-Prime Minister. As for the function, state councilor can hold the posts of respective ministers or the head of committees, and also can be in charge of special duties entrusted by the executive meeting of the cabinet. In addition to these, state councilor can work on diplomatic activities. Table 8.12 explains the following. Remarkable acknowledgment is given to the most distinguished university of science and engineering, Tsinghua University. As a matter of fact, besides the top ranking officials, there are many graduates of Tsinghua University among the medium rank and the lower rank executives (especially of the central government section in Beijing), which was called to be the Tsinghua University phenomena. At the end of 1980, graduates of Tsinghua University occupied around 40 percent of the total number of executives

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of ministers and provincial governors level (Wang, 2007).11 The data presented by Tsinghua University display that for the past 10 years, the total number of executives of ministers and provincial governors level reached about 300. Renmin University of China also has increasing figures of such posts. Interestingly enough, Renmin University of China was originally established to develop executives for the nation. However, the numbers of graduates who have been promoted to be top executives of the nation are much less than Tsinghua University. We think that the reason Tsinghua University (specialized in science and engineering) is in a superior position to Renmin University of China (a university with all faculties) might be arising from the greater importance attached to science and engineering fields in the authoritarian system. Compared with the graduates of Tsinghua University, the graduates of Peking University are said to have a stronger personality, whose general image is thus idealist. The graduates of Peking University who entered the political society (as in China both political organizations and bureaucratic organizations are united, both are difficult to be distinguished), were actually late to be promoted. The phenomena were closely related with external circumstances (that is to say the Chinese development stage). However, as stated earlier, even the technocrats graduating from science and engineering might gradually change their special fields according to actual jobs. Such technocrats who can change their special fields during the hard days of a market-oriented economy are successful to take positions at the time of bureaucrats in economy and finance. Accompanied with the change of the days technocrats who originally graduated from economy and finance will occupy more important seats. At the same time, since the 16th National Communist Party Meeting, the “Peking University phenomena” has appeared and the graduates of Peking University seem to rise with the ascending current (see later section about this). 11

Statement by Xu Xianglin, Vice-Dean of the Faculty of Management, Peking University, at the interview by Nan Fang Zhou Mo (Southern Weekend). Also see Wang (2007).

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7.3.2. Appearance of bureaucrats group in economy and finance and reshuffling tendency of the personnel of the Central Bank The bureaucrats group in economy and finance are classified into technocrats in a wider sense. However, their characteristics are different from traditional engineers who have graduated from science and engineering faculties. The bureaucrats group in economy and finance who are interested in economic rationality, efficiency, social welfare, economic globalization, etc., have fairly common characteristics with bureaucrats in law and politics. Appearance of bureaucrats group in economy and finance therefore might be a prelude of appearance of bureaucrats in law and politics. After the 16th National Meeting of the Chinese Communist Party in November 2002, the bureaucrats group in economy and finance have steadily started to appear in China’s central administration. The bureaucrats group members are allocated in the following party and national organizations. With regard to the party organization system, it mainly indicates that the central leaders group of economy and finance, and as far as national organization system is concerned, especially important are positions of Prime Minister, VicePrime Minister, State Councilor, Ministry of Commerce, People’s Bank of China (Central Bank), Ministry of Finance, National Development and Reform Commission (NDRC), National Economic and Trade Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission, Ministry of Industry and Information Technology, and Ministry of Transportation. In the following section, we investigate the appearance of bureaucrats group in economy and finance with two cases. (1) The prelude: The 16th National Meeting of the Communist Party At the 16th National Meeting of the Communist Party held in November 2002, which was the prelude of the days of Hu Jintao12 12

Graduated from Tsinghua University (1964), Department of Hydraulic Engineering.

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and Wen Jiabao,13 many bureaucrats in economy and finance were promoted. For example, Prime Minister Wen Jiabao who was in charge of economy and finance and Wu Bangguo14 who manages state-owned enterprises reform were promoted to become a member of the standing committee of the Political Bureau. State Councilor Wu Yi15 and Head of National Planning Committee Zeng Peiyan16 were promoted to be members of political bureau. Head of the National Committee of Economy and Trade Li Rongrong,17 President of People’s Bank of China Dai Xianglong,18 Minister of Finance Xiang Huaicheng,19 China Securities Regulatory Commission Zhou Xiaochuan,20 Minister of Agriculture Du Qinglin,21 Minister of Labor and Social Security Zhang Zuoyi,22 Minister of Transportation

13

Graduated from Beijing University of Mining and Technology (1968). Master’s Degree in Engineering. Engineer. 14 Graduated from Tsinghua University (1966), Department of Electronic Engineering. Engineer. 15 Graduated from Beijing Petroleum Institute (1962). Engineer. 16 Graduated from Tsinghua University (1962), Department of Electronic Engineering. Engineer. 17 Graduated from Tianjin University (1968), School of Chemical Engineering. Engineer. 18 Graduated from University of Finance and Economics (1967). Economist. 19 Graduated from Shandong University (1960), School of Chinese Literature. He took office as the Minister of Finance from March 1998 to March 2003, and now is the Mayor of Tianjin. 20 Zhou Xiaochuan (1948–) was born in 1948, and graduated from Tsinghua University (1985), PhD (in Engineering). He was a member of leading group for systemic reform of China’s cabinet, and Vice-President of the Systemic Reform Research Institute of Chinese Economy from 1986 to 1987. From 1986 to 1989, he was Deputy Minister of Foreign Trade, and from 1986 to 1991, he was a member of the Systemic Reform Committee of Chinese National Economy. He was Vice-President of the Bank of China from 1991 to 1995, and the Head of Foreign Exchange Management Bureau in 1995. In 1996, he took office as the VicePresident of the People’s Bank of China. In July 1997, he was the First Member of the Chinese Monetary Policy Committee. In 1998, he was the President of the Chinese Construction Bank, and in February 2000, he was the Chairman of Supervising and Management Committee of Chinese Security. In December 2002, he took office as the President of the People’s Bank of China, and now he is the Party Secretary and a member of the 16th Central Committee of the Communist Party in China. 21 In 1994–1996. He obtained a Master of Economic Management from Jilin University. 22 Graduated from Heilongjiang University (1966), School of Foreign Language (specialized in Russian Language). In April 2003, he took office as the Head of Heilongjiang Province.

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Zhang Chunxian,23 Head of General Bureau of National Tax Affairs Jin Renqing,24 General Bureau of National Customs House Mou Xinsheng,25 Minister of Science and Technology Xu Guanhua,26 President of the National Board of Audit Li Jinhua,27 and Minister of Construction Wang Guangtao28 were promoted or reappointed to be members of the Central Committee. Moreover, party secretaries and technocrats in the central management organization of economy and finance like Wang Xudong,29 Lu Fuyuan,30 Hua Jianmin,31 Yan Haiwang,32 and the Head of General Bureau of Civil Aviation in China Yang Yuanyuan33 were 23

Completed a Masters Course of Management Science of the North-East Mechanical Science. He took office as the Minister of Transportation in October 2002. In December 2005, he was the Party Secretary of Hunan Province and was transferred as the Chief of Executive Committee of Hunan Provincial Parliament. 24 Graduated from the University of Finance and Economics (1966). Economist. 25 Graduated from the North-West University of Politics and Law (1968), Department of Law. 26 Graduated from Beijing Forestry University (1963). Member of the Chinese Academy of Science. 27 Graduated from the University of Finance and Economics (1966), Master’s Degree in Finance and Economics. 28 Graduated from Tongji University, obtained a Master’s Degree in Road and Bridge. He took office as the Minister of Construction in December 2001, and was reappointed in March 2003. 29 Graduated from Tianjin Institute of Science and Technology (1982), Department of System Engineering. He took office as the Party Secretary of Hebei Province from December 2001 to November 2002. From November 2002, he was the Party Secretary of the Ministry of Information Industry. In January 2003, he was the Vice-Minister of Information Industry, and in March 2003 took office as the Minister of Information Industry. 30 Graduated from Jilin University (1970), Department of Physics. From September 2002 to March 2003, he was the Vice-Minister of Foreign Trade, and from March 2003, he took office as the Minister of Commerce and Party Secretary. In August 2006, he died of an illness. 31 Graduated from Tsinghua University (1963), Department of Automotive Engineering. Engineer. In 1998, he was the Vice-Head of the Central Leaders Group of Finance and Economy, and in March 2003, he took office as the Executive Committee and Head of the Cabinet Bureau. 32 Graduated from Harbin University of Architecture (1965). In April 1998, he was the ViceSecretary of the Executive Committee of Central Monetary Policy, and the Vice-President of the People’s Bank of China. In March 2003, he took office as the Party Secretary of the Supervising and Management Committee of Chinese Banks, and as the Vice-President of the People’s Republic of China. 33 In 1966, enlisted in the People’s Liberation Army. He trained as a pilot of the second reserve school in the People’s Liberation Army, and in 1968–1969 also studied at the high ranking school of China’s private civil aviation. In May 2002, he took office as the General Chairman of Chinese Civil Aviation Agency.

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selected as members of the Central Committee. Also, the presidents of four big state-owned commercial banks, namely the President of Bank of China Liu Mingkang,34 the President of Bank of Agriculture Shang Fulin,35 the President of Bank of Industry and Commerce Jiang Jianqing,36 and the President of Bank of Construction Zhang Enzhao,37 and the persons in charge of the big three oil companies and largescale state-owned enterprises, were placed in the name list of the Central Committee members or alternate members and Central Committee of Inspection of Discipline members (Yi, 2002). In China, their duty in the party secures their own administrative duty. Bureaucrats in economy and finance participated in the rank of the Central Committee might have change of duty but are secured of their important posts. After the Party Meeting in 2002, the average age of bureaucrats group in economy and finance was reduced to be 56 years old from 60 years old. (2) Extra time: Reshuffling tendency of the personnel of the Central Bank, from practical business type to scholar type When the bureaucrats group in economy and finance appeared, particular attention was focused on the reshuffling tendency of the personnel of the Central Bank. Needless to say, the Central Bank plays an 34

In 1987, obtained an MBA from the City University of London. In February 2000 to April 2003, he was the Chairman and the President of the Bank of China. Since April 2003, he has taken office as the Chairman of Supervising and Management Committee of Chinese Banks. 35 From 1978 to 1982, he studied at the Beijing Institute of Finance and Trade. PhD. 36 Graduated from Shanghai University of Finance and Economics (1984), obtained a Master’s Degree and PhD from the Shanghai Jiao Tong University. Since February 2002, he took office as the President of Industrial and Commercial Bank of China. 37 Graduated from Fudan University (1964), School of Economics. In January 2003, he was the Party Secretary and the President of Construction Bank of China, and the Party Secretary of Chinese Security and Asset Management Company. In November 2003, he was the member of the Central Committee of Discipline and Supervision, also in September 2004 he took office as the Chairman of general meeting of stockholders for the Construction Bank of China and the Party Secretary. On 16 March 2005, he resigned from the posts of Construction Bank of China and Chinese International Finance Co. Ltd., due to personal reasons. On 20 June 2005, he announced on the web site of Construction Bank of China that Zhang Enzhao was investigated by the Party Committee of Discipline and Supervision about illegal activities.

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important role to maintain the value of currency which is closely related with monetary policy. For transition economies such as China, the change which happened in the Central Bank reflects the degree of progress in the market-oriented reform. According to the revised version of Law on the People’s Bank of China, the division of function between the Central Bank and commercial bank was carried out. In the 21st century, the four state-owned commercial banks were steadily reformed to stock companies, which were listed in domestic and foreign stock exchanges. Meanwhile, the Central Bank has been attaching greater importance on macroeconomic adjustment policies particularly monetary policies. Therefore, the Central Bank needs more scholar type human resources than practical business type human resources. Zhou Xiaochuan, who took office as the President of the People’s Bank of China in December 2002, actively reshuffled the personnel of the bank to be more scholarly. In order to carry out the tasks of the Central Bank to adjust the macroeconomic situation particularly through monetary policies, new sections such as monetary stability section, financial market section, Zhengxin Guanli Ju (credit and confidence management section) (which was founded in November 2003 to manage the markets as a whole in evaluation of maximum amount of loan money, and whose main aims are (1) to supervise unfair competition on credit evaluation, (2) to supervise overestimation, (3) to reduce bank risks, (4) to secure enterprise information and national security, etc.), an anti-money laundering section were established. In October 2003, scholar type bureaucrat Xie Ping38 was promoted from the Head of Research Section of the Central Bank to the Head of Monetary Stability Section, and Yi Gang39 was promoted from ViceHead of Monetary Policy Section to the Head of the section. When Zhou Xiaochuan took office, the main tasks of the Central Bank were to eliminate financial risk which was accumulated for long years and 38

He obtained a PhD (Economics) from the Renmin University of China. He obtained a PhD (Economics) from the USA in 1986–1994. From 1994 to 1997, he was a Professor of the Chinese Economic Research Center of Peking University. In 2003, he was the Head of Monetary Policy Office of People’s Bank of China, and in July 2004, he took office as the Vice-President of the People’s Bank of China. 39

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to develop the economy at a stable and open environment. The monetary stability section was established to carry out the purposes. After the Supervising Management Committee on the Commercial Bank was founded, the task of the Central Bank has been to concentrate on monetary policy, thus the job of the Head of the Monetary Policy Section is said to be the central core of the Central Bank. On 29 December 2003, the Vice-Head of the Budget Policy Committee of the Executive Committee in the National Parliament, Su Ning,40 took office as Vice-President of the Central Bank. This was said to be an extraordinary personnel change. Traditionally, it is usual that a bureaucrat changes his position to be in the National Parliament organization. However, the reverse course change is rare. Su Ning is an expert who has a thorough knowledge of macroeconomic policies. With Zhou Xiaochuan, and Guo Shuqing,41 who is the Head of the National Foreign Currency Management Section, in the managing executives, the three experts on macroeconomic policy took office. In May 2004, Zhang Xin,42 Li Bo, Zhang Tao,43 all of whom have a career to study abroad, took office as the Vice-Head of Monetary Stability Section, the Vice-Head of Treaty and Legal Section, and the Vice-Head of Research Section respectively without following the normal procedure. On 9 August 2004, the Vice-President of the National Board of Audit, Xiang Junbo,44 took office as Vice-President of the Central Bank. One week later, on 16 August 2004, the other three 40

He obtained certification as an engineer, and was the Chairman of Macroeconomic Research Office of the cabinet. 41 He has been a well-known scholar in economics, and since the second half of the 1980s, he has studied China’s economic reform. 42 He obtained a PhD (Finance) from the USA (Columbia Business School) in 1996. After he worked for the Financial Division of World Bank, in January 2005, he took office as the Head of Financial Stability Office of the People’s Bank of China. 43 He worked for the Asian Development Bank as a Senior Economist during 1997–2004. Since 2004, he has been the Vice-Chairman of Research Office of People’s Bank of China. 44 Graduated from Renmin University of China (1985), Department of Finance, and obtained a Master’s Degree (Economics) from Nankai University, also obtained a PhD (Law) from Peking University. In 2002, he took office as the Vice-Head of the National Board of Audit.

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Vice-Presidents and President Aides were decided, which led to fundamental framework of reshuffling tendency of the personnel by Zhou Xiaochuan, which showed a President (Zhou Xiaochuan), five Vice-Presidents (Wu Xiaoling,45 Guo Shuqing, Su Ning, Xiang Junbo, Li Ruogu46), and three President Aides (Liu Shiyu,47 Yi Gang, Hu Xiaolian48). On 11 August 2006, when the cabinet signed, Fan Gang who is a scholar in macroeconomics and transition economies was appointed to the post of a member of Monetary Policy Committee of the Central Bank. The above-mentioned procedure indicates that the characteristics of structural reshuffling of the personnel at the Central Bank by President Zhou Xiaochuan was to transform from practical business type to scholar type. In order to carry it out, traditional personnel networks in which personnel promotions were implemented within the Central Bank or introduced from commercial banks were radically cut off, and various personnel promotions were carried out without the normal procedure.49 (3) Analysis When we analyze the change of bureaucrats group in China, we should be cautious of the following situations.

45

Graduated from the Research Institute of People’s Bank of China which is called the Huanpu Military Academy in the financial circle. He successively held various posts like the Head of Research Office of the Central Bank, and Chairman of the National Foreign Currency Management Office. 46 After he got a Master’s Degree (Law) from Peking University, he was a teaching staff at Peking University in 1984–1985. Since June 2005, he has been the Chairman and President of the Export and Import Bank of China. 47 Graduated from Tsinghua University, Department of Hydraulic Engineering, also obtained a Master’s Degree (Economic Management) from Tsinghua University. In 2002–2004, he was the Head of Administration Bureau of People’s Bank of China, and in July 2004 Assistant President and in June 2006 Vice-President. 48 Graduated from the Research Institute of People’s Bank of China (1981), and obtained a Master’s Degree. 49 Nanfang Zhoumo (Southern Weekend) 20 February 2004, and Jingji Guanchabao (The Economic Observer) 22 August 2004, etc.

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First, as stated above, many bureaucrats in economy and finance, who were promoted by Zhou Xiaochuan, graduated from science and engineering faculties. However, they were involved in jobs related with economy and finance and gained much practical experiences. They got enough knowledge on macroeconomic policy by what is said “learning by doing,” often observed in less developed countries. Second, behind the appearance of bureaucrats in economy and finance, the balance between party and administration has been attempted to be kept. Some important posts have been occupied by party executives. For example, of the posts after the 16th Party Meeting in 2002 was closed, the Ministry of Industry and Information Technology, Wang Xudong, was from the Organization and Personnel Management of the Party, the Minister of International Economy and Trade, Zhang Chunxian, was from Party Secretary of the Ministry of Transportation, and the Head of China Insurance Regulatory Commission, Wu Dingfu, was the person in charge of Discipline and Supervision Group, which is in the Board of Audit of Central Committee of Discipline and Supervision. Third, China’s new tendency to be managed by the bureaucrats in economy and finance has been expressed by the introduction of a job manager system to managers of state-owned enterprises. The tendency in which royalty index has been replaced by expert index has become remarkable. However, another problem has occurred. It is rather often reported that, because of inappropriateness to the tradition of state-owned enterprises, they had reluctantly resigned their posts. 7.3.3. The reshuffling tendency of the personnel at the 17th National Meeting of Communist Party: Demise of engineer-governed state days? The National Meeting of the Communist Party which is held every five years is, needless to say, a very important event to decide the future of China’s political system. It is quite reasonable that the attention of internal and external society would be paid to the trend of personnel at the 17th National Meeting of the Communist Party. On the

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personnel affairs of the Communist Party, the Executive Committee of the Central Political Bureau in the Communist Party occupies the central part. As shown in Table 8.13, all members of the Executive Committee of the Central Political Bureau in the Communist Party, which started in 2002, were originally engineers. Meanwhile, many posts which are paid attention to would be occupied by leaders of the next generation, who have graduated from humanities course faculties such as economics and laws. Advanced level educational backgrounds like a master’s degree and a doctorate would be an added advantage (see Table 8.14). Market-oriented transition and WTO affiliation of China have increased the need of experts in socio-economic management and a “calm revolution” has taken place in the leaders system, which has traditionally consisted of model workers, party affairs executives and engineers. In China’s bureaucracy system, we should pay attention on both the tendency of shift from “engineer” to “graduate from the humanities course” (including finance and economics, law, and politics) and the appearance of “Peking University phenomena.” The details are as follows. 7.3.4. Appearance of “Peking University phenomena” in the arena of China’s politics According to the NanFangZhouMo (Southern Weekly), 14 June 2007, the bureaucrats whose educational backgrounds are cultural science and social science at such positions as incumbent provincial governors and incumbent party secretaries occupied 75 percent of the total (coming from open materials to the public till May 2007). What was paid most attention on was the “Peking University phenomena,” which indicated that expanding positions and activities of the graduates of Peking University and by which traditional “Tsinghua University phenomena” might be replaced. The information presented in May 2007 expressed that incumbent executives at higher positions than of vice-provincial governors and viceministers with educational background of graduates of Peking University (both undergraduate students and graduate students) are counted

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Table 8.13 The Executive Committee of the Central Political Bureau in the Communist Party, which started in 2002 Name Hu Jintao

Wu Bangguo

Post President of PRC, General Secretary of the Communist Party of China, Chairman of the Central Military Commission Chairman of the Standing Committee of the National Parliament

Wen Jiabao

Prime Minister

Jia Qinglin

Chairman of National Committee of the Chinese People’s Political Consultative Conference Vice-President of PRC

Zeng Qinghong

Wu Guanzheng

Li ChangChun

Luo Gan

Huang Ju (died in June 2007)

Graduated

Career

Tsinghua University, Department of Hydraulic Engineering

Engineer

Tsinghua University, Department of Electronic Engineering Beijing University of Mining and Technology Hebei University of Technology, Department of Electric Power

Engineer

Beijing Institute of Technology, The Automatic Control Department Secretary of Central Tsinghua University, Discipline Inspection Department of Commission Automotive Engineering Head of the Central Group Harbin Institute of for Propaganda and Technology Ideological Work Secretary of Central Beijing Iron and Steel Politics and Law Engineering Institute Committee Vice-Prime Minister Tsinghua University, (in charge of financial Department of sector) Electrical Engineering

Source: Authors and Sankei Shimbun (4 August 2007).

Engineer

Engineer

Engineer

Engineer

Engineer

Engineer

Engineer

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Table 8.14 Leaders of the next generation

Name

Post

Graduated

Li Keqiang

Secretary of Liaoning Graduate School of Province Communist Peking University Party Committee Bo Xilai Minister of Commerce Graduate School of Chinese Academy of Social Sciences Zhang Secretary of Guangdong Kim Il-sung University Dejiang Province Communist (North Korea), Party Committee Department of Government and Economics Liu Yandong Minister of Unified Graduate School of Front Operation Jilin University Li Yuanchao Secretary of Jiangsu Graduate School of Province Communist Central Party Party Committee School Zhou Minister of Public Beijing Petroleum Yongkang Safety Institute Xi Jinping Secretary of Shanghai Graduate School of Municipality Tsinghua University Communist Party Committee

Degree and Career PhD (in Economics) Master’s degree (in Literature) Bachelor’s degree (in Economics)

PhD (in Public Administration) PhD (in Law)

Engineer PhD (in Law)

Source: Authors and Sankei Shimbun (4 August 2007).

to be 57. Particularly, the recently promoted 16 are minister-level executives, who include Shanxi provincial governor, Yuan Chunqing; the first secretary of the Central Secretariat of China Communist Youth League, Hu Chunhua; Shanxi province party secretary, Zhao Leji; and Hebei provincial governor, Guo Gengmao. 90 percent of the total 57 executives had graduated from humanities courses like literature, history, philosophy, law, economics, and politics; only two had graduated from science courses like physics and chemistry. Of the 57 higher ranking bureaucrats other than the vice-minister level, 39 were born in the 1950s (from 48 years old to 57 years old);

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most had appeared at the time of the 16th National Communist Party Meeting in autumn of 2002. Meanwhile, of the 36 executives at the position higher than minister level whose educational background were graduates of Tsinghua University, 29 were born in the 1940s and only five were born in the 1950s. Current executive ordinance regulates that the retirement age of executives higher than minister level is 65 years old, and of executives higher than vice-minister level it is 60 years old. Thus, within some years, of those high ranking executives who graduated from Tsinghua University, at least half of them would retire. Table 8.15 shows what has been mentioned above. Chinese University OB net announced the top 10 universities from which prominent politicians had graduated. The Peking University phenomena could be recognized from the list shown in Table 8.16. At present, the number of prominent politicians is mostly from Tsinghua University. However, sooner or later, Tsinghua University would be, we think, replaced by Peking University. Needless to say, the rising phenomena of politicians graduating from the humanities course would not be stopped by the Peking University phenomena and the phenomena would spread over the general universities (particularly faculties of the humanities course) all over the nation. The Zhongguo Xinwen Zhoukan (China News Weekly), January 2005, analyzed the personnel changes of 18 minister level executives all over China which proved the rise tendency of executives graduating from the humanities course. Of the 18, 14 (of which 70 percent had graduated from the humanities) were changed to new positions and four retired (of whom one was from physical education and three Table 8.15 Comparison of high ranking executives who graduated from Peking University and Tsinghua University

Peking University Tsinghua University

Executives of Minister Level (total)

Born in the 1960s

Born in the 1950s

Born in the 1940s

Born in the 1930s

16 36

1 0

7 5

7 29

1 2

Source: Wang (2007) and Authors.

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Table 8.16 Top 10 universities that prominent politicians had graduated from University 1 2 3 4 5 6 7 8 9 10 11 12

Tsinghua University Peking University Renmin University of China Jilin University Harbin Institute of Technology Fudan University Shandong University Shanghai Jiaotong University Beijing Petroleum Institute Nanjing University Chinese Institute of Science and Technology Beijing University of Education

Location Beijing Beijing Beijing Changchun Harbin Shanghai Jinan Shanghai Beijing Nanjing Hefei Beijing

Number 41 34 25 18 17 14 9 9 8 7 7 7

Source: Chinese University OB net (http://www.cuaa.net/), Research report on evaluation of Chinese Universities in 2007 jointly held by 21st Century Human Resource Report and University (journal), University, No. 2, 2007, etc. Note: Definition of prominent politician is as follows: incumbent minister and vice-minister level executives, provincial governors and ministers level government executives, the 14th, 15th, 16th Communist Party Central Committee member and candidate member.

were from the science course).50 It seems to us that executives graduating from the science course have shifted to executives from the humanities course. 7.3.5. Attaching importance to raise human resources outside the Communist Party In 2007, Chinese politicians from the Democratic Party group were appointed as cabinet ministers. After the Communist Party administration was established in 1950s, talented politicians of the Democratic Party were once again appointed as ministers. For example, Huang Yanpei was appointed as Minister of Light Industry, Zhang Bojun as Minister of Transportation, and Shi Liang as Minister of Justice. 50

See Zhongguo Xinwen Zhoukan (China News Weekly), 10 January 2005.

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There have been eight Democratic Party groups in China, each has its own history. However, after the new China was established, each had accepted the leading position of the Communist Party and has agreed to support the nation building plan of the Communist Party. The Democratic Party group in China was in the position as parties of participation in the government, and they offer their opinions at opportunities such as political agreement conferences. Table 8.17 indicates the details of the Democratic Party group. After the “anti-right movement” in 1957, the eight Democratic Party groups suffered from serious damages, by which members of the Democratic Party group could be appointed only as vice-governor level executives under the “political arrangement.” From 2005, the situation has gradually changed, when the Central Communist Party promulgated the Fifth Official Document prescribing that qualified executives from outside the Communist Party could take office as the head, which was the new prescription to break away from the traditional practice. In July 2006, the central unified front section conference indicated the guidelines to enforce bringing in and promotion of executives outside the Communist Party. Since the second half of 2006, in each level of government section, arrangement of personnel changes has been proceeding. During the period of the Chinese National Parliament and Political Agreement Conference in March 2007, government spokesperson asserted that minister level executive from the Democratic Party group would be appointed in the near future. At the first half of 2007, the prediction came true. First, on 27 April 2007, the 10th executive committee of the National Parliament appointed Wan Gang51 to be the Minister of Science and Engineering. Wan Gang is the first minister from the Democratic Party group in 35 years after Fu Zuoyi resigned as the Minister of Hydroelectric Power Generation in 1972. Two months after this, on 29 June 2007, the 28th executive committee of the National Parliament appointed Chen Zhu52 to be the Minister of Health, who is not a member of any party. We could 51

President of Tongji University and Vice-Chairman of Zhigong Party, expert in automobiles; born in 1952, from 1985 studied in Germany and after that stayed in Germany for 15 years. 52 Vice-Chairman of the Chinese Science Association, expert in medical science; born in 1953, from 1984–1989 studied in France and obtained a PhD.

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Table 8.17 Details of the eight Democratic Party groups Title of the Party

Established

Remarks

Revolutionary Committee of Chinese Kuomintang China Democratic League

1948.1

Established by reformist group of Nationalist Party opposed to dictatorship of Chiang Kai-shek

1941.3

China Democratic National Construction Association China Association for Promoting Democracy

1945.12

The forerunner was Chinese Democratic Politics Union. Most of the members are intellectuals who contribute for cultural and educational circles Racial industry and commercial business persons, and intellectuals who are closely related with the business persons

1945.12

Chinese Peasants and Workers Democratic Party

1930.8

China Zhi Gong Party (Public Interest Party) Jiu San (September 3) Society

1925.10

1944.11

Established by proposals of teachers of elementary school and junior high school, and intellectuals in publishing business circles those days. At present, majority of the members are intellectuals of cultural and educational circles who are trying to promote patriotic democratic campaign The forerunner was Chinese Nationalist Party Extraordinary Activity Committee. In 1935 they changed the name to be Chinese Democratic Liberation Activity Committee, and in 1947 the present name was given. Majority of the members are high ranking intellectuals in the circles of medical and health, science and technology, and cultural and education In May 1947 the party was reformed. Majority of the members are returnee overseas Chinese The forerunner was Democratic Science Party, whose name was changed to be the present in September 1945. Majority of the members are high ranking intellectuals in the circles of cultural and education, and science and technology, who are chiefly promoting democratic movement (Continued )

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Title of the Party Taiwan Democratic Self Government League

Established

Remarks

1947.11

Consisted of compatriots whose domicile of origin are Taiwan and who live in Chinese continent and promote patriotic democratic campaign

Source: Authors.

recognize many similarities between Wan Gang and Chen Zhu, of which their broad outlook on international affairs closely connected with their background of studying abroad, which could be considered to be an outstanding advantage. Generally speaking, China’s executive system has been exposed to the trend of time, and it has been necessary to be reformed. It might be probable that power struggle between the old and new power will continue for the time being. However, since China’s reform and open door policy has gone into an irreversible orbit, the days of ruling the country by experts will surely come sooner or later. In the Chinese Communist Party National Meeting held every five years, the reshuffling of personnel has been steadily carried out, even though there is no slogan like the reform of party administration as in Taiwan in the 1950s. 7.3.6. The dual structure phenomena of bureaucrats group in the transition period Under the authoritarian system in China, when bureaucrats are selected, the traditional criterion to select them was to attach greater importance on royalty and not on expertise. It became a traditional practice to select executives among basic governments, state-owned enterprises, ex-soldiers, and model workers.53 Thus, 53

For example, both Li Ruihuan, the Mayor of Tianjin City directly under the Central Government in the 1980s, and Zhang Baifa, the Vice-Mayor of Beijing City directly under the Central Government also in the 1980s, were model workers of the nation in the 1950s. Besides, Li Ruihuan took office as a member of the Executive Committee of Central Political Bureau.

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traditional practice economy and traditional practice way of selecting executives established causal relationships. After the 1980s, because such selected executives had weak knowledge on market-oriented economy and modern method of management, inappropriateness to adjust regional economy and to manage regional society became clearer. Also because market-oriented economy has developed, the necessity for expertise has been higher and bureaucrats in economy and finance have occupied important positions in place of bureaucrats in science and engineering. Such observation suggests that China’s bureaucrats group might have a dual structure. It would be a good situation for China in the transition period that the traditional bureaucrats group has changed to be a dual structure. Countries in systemic transition have to experience dual structure in various aspects. In the ferry boat called dual structure, relations between new and old systems are the same situation as the “bitter enemies in the same boat.” The details of the dual structure in the bureaucrats group are as follows: (1) In the aspects of domestic politics and administration, particularly in the monetary and financial aspects (as mentioned above), civilized bureaucrats group with enough international sense has gradually came into existence, which was usually called the scholar type bureaucrats and has corresponded to the Taiwanese technocrats from the 1950s to the 1980s. Meanwhile, however, (2) in local politics and regional economy, the traditional way to select bureaucrats has remained unchanged. Quality of the local bureaucrats group might not be enough. In order to have a well-managed regional economy and society, as they lack a logical mind and knowledge, quite often wrong affairs could occur. The local government’s case in which, public welfare problems are neglected, they are busy making money from development booms, is a typical example. Also, ignoring the central government’s position of attaching greater importance on the three agricultural problems, high ranking local government officials usually know nothing

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about the helpful way to use money to eliminate the three agricultural problems.54 Why have such different phenomena occurred? In international aspects, when China had progressed towards an extroverted market economy, the central government’s politics and economic policy (particularly on financial aspects) has been linked with and suffered from international economy. As a matter of fact, therefore, in China there has already been an unmanageable situation without experts. However, in internal aspects, China has still been at the stage of industrialized development, in which manufacturing has been a major industry in each regional economy. Also, the main industry of China’s manufacturing has been the processing industry whose characteristics are low value added productivity. Based on cheap labor and cheap land cost, attracting capital can easily contribute to increase GDP, which secure the promotion of the local government’s bureaucrats. The above-stated actual management of regional economy could be dealt with by traditional bureaucrats. The situation changed substantially at the end of the 1990s. Urbanization was accelerated, and various social contradictions (like land requisition problems) clearly existed, and institutional reform had become indispensable. Acceleration of the economic growth has promoted differentiation of social strata, and the propertied classes have been coming into existence in China. In order to deal with the new situation, the fourth constitutional amendment was carried out in 2004. The Real Right Act was signed at the National Parliament in March 2007. With the evolution of urbanization after 1999, real estate bubble has occurred all over the nation. Price soaring phenomena of housing were closely connected with corruption by bureaucrats, which was a serious cause of dissatisfaction of Chinese people. Economic development has become a driving force of social mobility and it is necessary for keeping social stability to promote 54 According to the author’s interview at several places in coastal areas, a certain head of local government complained that hardest work every year was to use up too much amount of the budget.

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capable bureaucrats. However, because the organizational structure of bureaucrats is established with a pyramidal shape, the number of bureaucrats at the top rank is relatively smaller. Although, therefore, when the President like Zhou Xiaochuan displayed leadership, reshuffling personnels of a particular organization was possible. In the local areas, there are enormous number of bureaucrats and it might be impossible to reform the bureaucrats group by the head of governmental organization. In China, which has the dual structure phenomena of bureaucrats group, it is indispensable to radically reform the executive selection system. 7.3.7. Possibility of success of bureaucrats in law and politics: A symposium on the role of lawyers in the political reform in China On 2 June 2005, a joint symposium of Carnegie Endowment for International Peace and Asian Foundation entitled “The role of lawyers in the political reform in China” was held. The Head of the International Cooperation Section of China’s Ministry of Justice, Gong Bing, indicated after his retrospect on the role of lawyers in the USA that, in the phenomena of ruling the country by technocrats in China, there are many wrong assumptions about the role of lawyers (the number of professional lawyers in China is around 120,000) and mentioned a critical view that many political leaders have negative opinions of the lawyers who are unrelated to politics or are politically heterogeneous. Also Jerome Cohen, who is a Professor at New York University and an expert of legal problems in China, gave the following comments: not only the USA but also the former USSR had political leaders who were professional lawyers. Lenin appeared in court as a lawyer. In the early stage of Soviet administration, there were leaders from the judicial world. Gorbachev was also from the judicial world (he also had a degree in agricultural economics — by the authors of this book). However, as for the Chinese leaders, nobody is from the judicial world and nobody is knowledgeable about the law. Recently, when the Members of the Political Bureau of the

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Central Committee of the CPC were changed, the Chief Justice of the Chinese Supreme Court, Xiao Yang,55 could not become a member of the Central Political Bureau, whose place was occupied by an executive56 in charge of National Security. An interesting point for us with regard to the argument was that the bureaucrat of Chinese Ministry of Justice emphasized his own views at the symposium held in the USA. In the authoritarian system, because the Ministry of Justice has been under various restrictions originally given by China’s Constitution similar with the National Parliament, they have been longing for judicial independence. It is uncertain for us whether or not the aim of participation in the symposium of the bureaucrat of China’s Ministry of Justice was to make use of the pressure from abroad. However, we might say that, in the process of China’s economic development, their consciousness which was suppressed for many years started to be awakened. Similarly, the standing committee of the parliament in China’s local areas (Chinese people’s representatives hold additional posts and they participate in the National Parliament once a year, whose session lasts less than 10 days. Thus, the standing committee has been established as a executive organization) has become more self-assertive. The more advanced the region, the more self-assertive it is. For example, in Wenling City of Zhejiang province, where market-oriented economy is fairly developed, implementation of the democratic conference system which was established to supervise the government budget is paid attention to. There were other interesting things discussed at the conference. As stated earlier, the phenomena of ruling the country by technocrats 55

Graduated from Renmin University of China (1962), Department of Law. He was the Minister of Justice from March 1993 to March 1998. In 1998, he took office as the Chief Justice of the Supreme Court. 56 Guo Boxiong, General of the People’s Liberation Army, and the Vice-Chief of Staff of Executive Director in the People’s Liberation Army. In 1999, he was a member of the Central Military Committee of the Communist Party, and a member of the National Military Committee. He was selected as a member of the Central Political Bureau in 2002.

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would be an inevitable result of the authoritarian system. In China, the days of ruling the country by technocrats has already started, and also has a shifting tendency from technocrats to bureaucrats in economy and finance, which raises the question whether technocrats days at the stage without sufficient successful results has already received the challengers, the bureaucrats in economy and finance? The expectation for lawyers to play a role in political reforms in China means to rapidly promote institutional democratization. What are the warnings behind this? (1) In the world of globalization, domestic economy and politics will certainly face international challenges with environmental changes. With regard to economic aspects, China has to overcome both tasks of industrialized days (substantial everyday life for its people) and post-industrialized days (environmental protection). From viewpoints of politics, contemporary China cannot have enough time as Taiwan and South Korea could previously have, whose procedure indicates that first these countries developed with authoritarianism and technocrats, and then transformed towards democratic and constitutional state. As stated before, the authoritarian system of Taiwan and South Korea was tolerated by the USA because of the Cold War. Undoubtedly, China has its own advantage and is stronger against pressure from abroad than Taiwan and South Korea. However, everything has its limits. When China was the target of economic sanctions due to the Tian’an’men affair in 1989, the sanctions worked substantially against China. After China participated in the WTO, such type of sanctions will work more seriously. (2) With economic development in China, it might be recognized the deterioration of political corruption, economic disparity, environmental disruption, human rights problem, etc., but not everywhere. Those internal political events might damage the legitimacy of the authoritarian system. The Tian’an’men affair in 1989 was the typical example, and the Falungong affair at the end of the 1990s had serious effects on

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the Chinese society.57 Behind the above two affairs, various social problems have been closely related with them. The bureaucrats group, which grew corrupt, caused people’s centripetal force to the government to be weaker. With regard to internal and external pressures, China’s politics at present needs more wisdom than before. In order to prevent corruption, the following reforms seem to be indispensable: (1) The reform of the selection system for executives. It is necessary to become free from dogmatic authority of party organizational division and to transform towards a more transparent system. The deficiency of the current selection system for executives indicates lack of a corruption prevention system. As shown in Figure 8.5, a committee for party discipline was established; however, because corruption events by secretaries of the committee for party discipline occured rather often, the failure of this system might be clear for everyone. (2) It is necessary for judicial independence to prevent corruption. We think it is not admissible that judicial judgment is replaced by disciplinary punishment by the party. 57

Falungong is a big scale private organization whose aim is to practice training the body and the spirit (it is said to have more than 10 million members), which propagates the idea of main doctrine of code and truth, goodness and patience, which has also openly opposed the Chinese Communist Party (for example, on 25 April, people were surprised by the protective activity, where more than 10,000 followers sat down and surrounded the Zhongnanhai (the center of China’s politics and place of residence of top ranking officials of the Chinese Communist Party). In July 1999, it was convicted of diabolical religion by the Chinese government (according to the announcement of the Chinese government, before July 1999, the number of Falungong followers who had died from various reasons reached more than 1,400; of whom 136 Falungong followers committed suicide because of the doctrine which disregards life and death. Besides this, Falungong followers have actively organized movements against the Chinese Communist Party to deviate from social orders like surrounding governmental organizations and news media). Many followers like Li Hongzhi, the founder of Falungong, defected to foreign countries. However, at present, Falungong followers carry out organized hostile actions against the Chinese Communist Party in foreign countries. For example, from June 2002 to August 2003, Falungong organizations in foreign countries were crowding the satellite broadcasting of China’s central TV, educational TV, and more than 10 other local TVs, which were widely reported both at home and abroad.

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(3) The establishment of a Civil Servants’ Property Declaration System of civil servant’s assets. By the resistance of the group acquired vested interests, China’s Public Servant Act revised in April 2005 could not have the article on the Civil Servants’ Property Declaration System, which indicate to us the importance of the system. (4) The necessity to establish an anti-corruption organization. In China, at present, there are several different anti-corruption organizations such as the Supervising Committee of Discipline which is part of the Communist Party, the Anti-Corruption and Anti-Bribe Agency which belongs to the Public Prosecutor’s Office, and other divisions and agencies like the Public Security Division and the Inspection Agency which take part in investigations of corruptions. We think it is necessary to establish a high ranking unified anti-corruption organization for which only the supreme director is responsible, like the Independent Commission Against Corruption (ICAC) of Hong Kong. The ICAC of Hong Kong carries out investigations and collects evidence against corruption. However, ICAC has no authority to charge, and this responsibility is given to another governmental organization, the Agency of Judging Politics. Thus, the power of ICAC is quite limited. Moreover, reciprocal checking power system with another agency effectively works. Also, such anti-corruption organization should be supervised by society (with establishing an institution to report to parliament, ombudsman and supervising committee of citizens). (5) To advocate the “zero toleration culture against corruption” in the Chinese society. Nowadays in China, the saying that corruption is a Chinese culture might be recognized. A citizen’s attitude promotes corruption. We think it is a good way to include anti-corruption education in schools. (6) To have a guidance for detailed regulations in the execution of government official’s duties. Citizens should pay careful attention to corruption. Legitimacy of the authoritarian system in China can be seriously damaged by rampant corruption in the society. Effective ways against

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corruption should be established. Meanwhile, however, introducing the above-mentioned anti-corruption measures may change the characteristics of the authoritarian system, which could result in the authoritarian system opposed to the authoritarian system.

8. Conclusion 8.1. Suggestions by the two authoritarian development models The legitimate bases of the authoritarian system are (1) high speed economic growth and (2) shared growth. In this chapter, we compare the introversive Southeast Asian model with the extroversive Asian NIEs model. The latter succeeded in both high-speed economic growth and shared growth; meanwhile, the former succeeded in high speed economic growth but is still far away from shared growth. It is also worring that about income disparity increase may hinder further economic development. For example, lack of sufficient domestic demand becomes an obstacle for increased production. As it is wellknown, shared growth is not only the final goal of development but also the necessary condition for sustainable development. East Asian NIEs model countries and regions realized the peaceful transformation of power structure, which became possible by rational authoritarianism of high ranking officials and through support of the middle class. Creation of many middle-class citizens was the result of shared growth. How was the shared growth to make modernization of citizens and industry coexist realized? It is indispensable to carry out a rational development strategy (like the extrovertive strategy towards a market-oriented economy) and institutional reform (like land reform at the initial stages). Those successful strategies were established by rational leaders and rational technocrats. They acquired lots of experiences, knowledge and culture in domestic and foreign societies which led them to a flexible way of thinking coordinated with the external world. Bureaucrats in Taiwan and South Korea implemented successful export-oriented strategies harmonized with international economy and succeeded in their

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Transition of institution: the core of the reason

Political aspects: Rational authoritarianism: technocrat • Civilized leaders • Reform of party administration

Social aspect: middle class

Advantageous international environment Economic aspect: shared growth

Planning of a rational development strategy

Figure 8.7 Economic development and systemic transition in East Asian NIEs model Sources: Authors.

appropriate positions in the post-war international order led by the USA (see Figure 8.7). It was the exact opposite of Southeast Asia, where the concern was about their dependent position. Even though there were some rational leaders and rational technocrats in Southeast Asia, they basically failed to open their economies due to complex religious and racial conflicts. We have stated in this chapter various characteristics of political and administrative aspects in the East Asian model by explaining the Taiwanese experience. The following two are the most important: (1) We could recognize that both agricultural land reform and local autonomous system at the early stages of development (1950s) were the bases to make the authoritarian system in Taiwan stable. Compared with Taiwan, South Korea was similar in carrying out

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agricultural land reforms. However, with regard to political system, a direct election of the President was put into effect in the earlier period (1987) but direct elections in local areas were realized at later period (1991).58 The process of democratization in South Korea “from the top to the bottom” was the opposite of Taiwanese democratization process of “from the bottom to the top” (what is called a direct election of the President in Taiwan was implemented in 1996 for the first time). The difference of democratization process of South Korea from Taiwan might be related with the economic development model in which the chaebol (South Korean zaibatsu) played the central roles. That is because at the election of the President, the chaebol could work better than inconsistent ordinary people, and also because the chaebol contributed to relative stability of the political situation and to the maintenance of the authoritarian system. On the contrary, the Taiwanese model of economic development could be said as small- and medium-sized enterprises playing important roles, which might be related with the local autonomous system. However, even we could recognize significant causal relationships between the authoritarian system and the industrial structure, it might be difficult to judge scientifically the cause and effect of the two (for example, according to the Marxist theory, it is said that the economic structure decides political structure, which might be plausible). Moreover, we would continue to ask for reasons why industrial structure of each country and region has been different? (2) Under the extrovertive market-oriented system, a group of technocrats was promoted to political leaders and administrative executives. At the institutionally less developed stage, those technocrats 58

On 25 February 1988, Roh Tae Woo was installed as the 13th President. During his term of office, several changes in political structure had appeared. For example, although the authority of the Parliament and independence of the Supreme Court was reinforced, authority of the President was reduced. Local autonomous system was restored. The local autonomous system, which was established during the Syngman Rhee administration, was abandoned since Park Chung Hee administration started. In May and June 1991, two local autonomous governments level parliament elections were carried out.

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demonstrated their ability of institutional rationality and moral independence which played a kind of substitute of immature institution. Accompanied by the evolution of a socio-economic system to be more complicated, in order to have better governance, wisdom of the technocrats group was never enough, which led to the active involvement of civil society for public policy. It could be recognized as a prelude to political democratization. In line with the social tendency, institution building particularly establishment of legal order became a central task for the society, also in concert with which characteristics of top leaders and bureaucrats transformed from science and technology centered to law and politics centered. In addition to the above, East Asian NIEs model countries and regions have some similar social characteristics, examples of which are as follows: (1) They are racially homogeneous countries and regions, which seemed to contribute to promotion and maintenance of the social centripetal force. (2) They have polytheism. It could have arised from Confucian supremacy, which contributed to social generosity. (3) They are small-sized countries and regions, which made it easier for sustainance of social uniformity. For example, as symbolized by “all Japanese belong to the middle class,” it is easier to realize shared growth. However, this may not be natural. There are many countries which are small-sized and have substantial disparity. Moreover, Japan is not, as a matter of fact, a small-sized country, because Japan has around 130 million population (but compared with China, Japan is much smaller in size). With regard to external environments for East Asian NIEs model countries and regions, we could recognize some common characteristics. In particular, they have been supported by the USA directly or indirectly. Both South Korea and Taiwan have been directly supported by the USA. On the contrary, Hong Kong and Singapore

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were contributed by the USA for their export market and for the development of their technocrats.

8.2. China’s tasks Can China become a member of the East Asian model? Analysis of two Asian models gave China careful suggestions indicating that, without establishing a people centered model of economic development, it is impossible to have successful modernization and successful systemic transition. By the Deng Xiaoping’s reform and open door policy, China gained the initial logic towards an extrovertive market economy. However, it was only a necessary condition but not a sufficient condition. In this chapter, in light of the shared growth concept, we have analyzed the problems of Chinese society from viewpoints of (1) relations between urban and rural, and (2) characteristics of bureaucrats, which lead us to the following concluding remarks: (1) As stated before, there are serious differences in industrialization ratio between production and employment. We should emphasize the necessity to introduce industrial policies attaching greater importance on employment, and policies related to rural areas to make peasants more active and free (by measures such as land reform and local autonomous system). (2) Since the Deng Xiaoping’s reform in 1978, China has still been ruled by technocrats in science and engineering. However, we could recognize substantial change from the end of the 1990s. Compared with the traditional ruling of a country by technocrats, bureaucrats in economy and finance have occupied a significant position in China’s administration. We think that this has been caused by the development ideology towards an open economy and society. In China, the necessity to have experts in economic and social management has been recognized, which seems to be an irreversible tendency. Meanwhile, at the same time, China has serious problems to be overcome which are (1) the dual structure of bureaucracy in vertical administration strata, and (2) corruption.

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(3) In the days of globalization, introversive management of economy and politics has become impossible. Internal problems might be received by international pressure. Also we could understand that, when China tries to solve the above-stated problems, the logic saying “authoritarian system is opposed to authoritarian system” comes into existence.

8.3. Future of political systemic transition in China: Open system and Birdcage fable In this book as a whole, we investigate the logic of transition and development in China. The priority of China’s transition has extended one after another from rural to urban, from coastal to inland, from private-owned to state-owned, from economy to politics. Taking into consideration the East Asian model, every scholar would pursue the future of China’s development model by asking, “could economic liberalization lead to political democratization?” We do not avoid the crucial problem in this book and insist on the fact following mechanism of institutional change, in which reset of initial condition called the open system has been particularly important. This reminds us of a short story which was read many years ago, the title of which we are not sure of but the tentative title should be “A Birdcage.” The hero of the story bought a wonderful birdcage and was satisfied with looking at it, but he did not intend to raise a bird. However, all the friends, neighbors, mail carriers, etc., who visited his home always asked him, “What did the bird do? Did the bird die?” He responded politely to each one at the beginning, “No, I have never raised a bird.” When the visitor asked, “Then, when will you raise a bird?” He answered, “No, I do not have a plan to raise a bird.” When the visitor asked, “Why don’t you? Why did you buy such a wonderful birdcage even you don’t intend to raise a bird?” The hero of this story who was tired from responding to the same questions finally reached a solution. He bought a bird. Since then, he was never asked persistent questions about a bird.

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The birdcage fable, we think, might seem to connote plausible explanation and future forecast of political democratization of China. “What will the future of China’s democratization be?” Or to be more concrete, “What will the future of China’s parliamentary system be?” By looking back at the past, with regard to the democratic system design in China, we recognize that China has already had many fine birdcages. For example, they have such fine birdcages as the “parliament system,” and the “judicial system.” However, we could not find any suitable birds in the respective birdcages yet. Different from the years before 1978, at the present time when China opened its door to the external world, many guests and friends have visited China. They have always asked the question about “that bird” taking into consideration various fine birdcages. Then what kind of response does China give to the visitors and what kind of attitude does China take? There are some possibilities. For example, (1) it is tired of responding to the same questions and finally gets angry, and turn its visitors away. After that nobody visits. (2) It is tired of responding to the same questions, and finally hides the birdcage or throws it away. However, the guests who know that China had the birdcage would wonder and ask, “Where is the birdcage?” (3) They are tired of responding to the same questions, and finally get some birds, as that story says. If the response is as the above (1), it means that China would return to being a closed country (as it was before 1978). Chinese people today are no longer interested in the Mao Zedong era. Thus, this option is not likely to be chosen. If the response is (2), in China, all institutions and organizations except administration offices and party organizations would be abolished. The Chinese society would fail to function properly and would be completely paralyzed. Thus if China selects the way of (2), it points out that China would be out of control and be ruined. If the response is as the above (3), it indicates that China would establish more harmonized relations with the international society. Since China’s transition and development had started by resetting the initial conditions of the reform and open door policy, the above (3) could be most probable. Needless to say, it is not enough to infer so simply. In this book, we try to develop concrete ways of the process. Although the fact

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following mechanism of institutional change in Chinese society (see Chen Yun, 2009 on this concept), much deeper-rooted pressure has been from internal society. Institutions such as an standing committee of the basic level parliament and court of law have the awakening of their raison d’être and have started to assert themselves. In light of the original institutional design, the birdcages which have no reasonable contents thus far, have started to seek their own birds. Taking into consideration the open system, it should be careful that both internal pressure and external pressure have been unified.

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Chapter 9

Regional Integration and Path Dependence: On the Relations among Europe, the USA and East Asia

1. Introduction The Vienna Institute for Comparative Economic Studies (WIIW) showed in February 2008 that “the majority of the new EU member countries have been enjoying a period of robust economic growth.” Even with the global financial market troubles, their GDP growth rate is expected to decrease slightly to around five percent (over the period 2008–2010) from about six percent in 2007. According to WIIW, their economic growth will be mainly from rising consumption and investment, whose “latter will be bolstered by much higher transfers from the EU budget.” Both rising consumption (from rising labor incomes) and investment, and EU budget transfer are, needless to say, the effects of joining EU. Since their labor markets have improved drastically, unemployment rates have declined. We can point out from viewpoints of this chapter that they are positively due to their extroverted tendency towards the international society, EU. Compared with the tendency towards extroversion in EU countries, East Asia has been seriously characterized to be introverted, based on which it may become difficult to view their creation of institutional integration. In this chapter, we examine the issues with the neo-institutional approach. This chapter is divided into nine sections and the concluding remarks. In the first section, we summarize the Chinese way of thinking and the Japanese way of thinking on the Asian Community issues. In the second section, we study EU enlargement, focusing attention on its 405

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short history. In the third, we describe the de facto integration in East Asia. In the fourth, we consider the international order from viewpoints of public goods approach. In the fifth, we examine the principle of nationalism and the way towards internationalism. In the sixth, we study the short details of the rise of regionalism in East Asia. In the seventh, with regard to internationalism and international exchange, we analyze East Asian internationalism based on reiterated Prisoners’ Dilemma approach. In the eighth, we consider the current situation of FTA and FDI of East Asia in comparison with EU. In the ninth section, we examine the possibility of Asian Community from the neo-institutional approach and, finally, concluding remarks are given.

2. What Should We Understand of the East Asian Community: On the Viewpoints of China and Japan 2.1. Developing countries and regionalism: The Chinese way 2.1.1. Why “regionalism”? After World War II, emerging nation states successfully reached independence. They were released from painful history of the supremacy of suzerain states and the nation states independence had become the most important belief for them. We think the fact that many Asian leaders who led independence movements had studied abroad in Europe and the USA is a very important reason. They learned sense of values in freedom and independence in Europe and the USA. The influences of suzerain states to Asian colonies have taken various effects on Asian countries. However, emerging nation states, which were enthusiastically building their nations, had suffered from the Cold War. As a matter of fact, the concept of neutrality can exists only theoretically; actual implementation was difficult to do. Since their internal political and economic structures are vulnerable, they could not resist pressures from external environments. In the meantime, the rise of regionalism had gradually started. What are the reasons for this? We think there are the following three

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reasons: (1) the regionalism then appeared to support the building of nation states. They expected to realize their goals of economic construction and security of sovereignty through regional integration. (2) When capital movements were activated all over the world, because they had poor economy, weak military power, and unstable internal politics, they were concerned about being penetrated by advanced capitalist countries, as the dependency theory suggests. They thus believed that, without cooperation among developing countries, their dependence could be broken down. (3) After all, European Community showed a successful example of regional integration which gave a good suggestion to the world. As a result, in 1951, of the total 107 international organizations, the regional organizations numbered 45. In 1962, they increased to 162 and 93 respectively.1 The main expansion of regional organization was occupied by developing countries. During the 1960s to the 1970s, extreme racialism movements had occurred, and movements such as the “Non-Aligned Movement” and “77 countries group” came into existence. In the 1980s, regional organizations increased in both quantity and quality. We can recognize various factors behind the rise of regionalism at this period. First, because the North-South negotiations could not reach any conclusion, the influence of the developing countries in international order was still weak. At the same time, vulnerability of developing economies meant human rights and democracy was seriously criticized by western industrialized countries. Thus, regional alliance could act as a breakwater. Also, the promotion of economic cooperation in the regional market contributed to the expansion of member countries’ market, and to risk alleviation in international economy like economic conflicts. Some regional organizations actually came to terms with regional security issues and contributed to regional stability. Second, within developing countries, earthshaking changes and imbalance of economic development had occurred. The unified 1

Russet (1967), p. 225.

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“third world” no longer existed, and the integration of countries which are closed in circumstance and position has become a real task. Third, regardless of developed and developing countries, these countries have faced many global tasks, such as the environmental problem, the population problem, the AIDS problem, and the drug problem. Such serious tasks concerning shared interest seem to contribute to the creation of regional integration and cooperative relations among them. Fourth, the incentive exists within developing countries. Industrialization and modernization have been accompanied by socio-cultural movements within these countries, and exchanges have increased across the border through religious groups and intellectual groups. The NGO and NPO organizations of multi-countries can be created by crossing the nation-states, and can contribute to regional integration and the creation of a cooperative system. 2.1.2. Guideline for regionalism in China and tasks in Asia China, during the days of the Cold War, was in a special international circumstance and was skeptical about regional organizations. After the reform and open door policy, China participated in regional organizations. It was an important expression of “open China.” The regionalism in China was at least divided into two stages. Until the 1990s, it was generally said to be the preliminary stage. Although China built foreign economic and trade relations and also created communication mechanism with neighboring countries, China did not participate on its own. After the 1990s, however, China actively participated, for example, by joining the APEC and playing important roles for creating the Shanghai Cooperative Organization. Recently, China actively tried to negotiate to complete the FTA with ASEAN countries, some of which have reached successful results. Also, China had tried to create economic cooperative regions among multi-countries from North to South, such as the Tumen River Delta economic region with Russia at their border, the Yellow Sea economic region with the Korean Peninsula and Japanese Kyushu area, the Taiwan Channel economic region, the

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Mekong River Delta economic region with the South-East Asian countries. The reasons why China has actively tried to be involved in such regional organizations seems to be a Chinese plan, which is to have a position as a superpower in the global society in the future as well as, under Chinese circumstances as a potential superpower. Thus, China’s participation in sub-regional organization can be thought of as an opportunity for China to lead in the construction of regional rules and to play more important roles to involve much larger international organizations in the future. Meanwhile, with regard to the current situation on regional integration like the East Asian Community, it should be said as less mature compared with the European integration. We can say that the EU as a whole is considered to be single nation-states; and with the same figurative expression, East Asia should still said to be in a feudalistic situation. Since East Asian countries cannot find any shared interest, they think that their international relations are not of the “win-win game” but of the “zero-sum game” (although actually their economic and trade relations and human exchanges have become more active than before). The main obstacle against it, we think, is the asymmetry. The asymmetry concept has been widely recognized in East Asia such as the size of the nations, economic development levels, ideology, etc. Also the two big countries in East Asia, i.e. China and Japan, have never experienced equal partnership relations although both the two countries have been associating with each other for thousands of years. Both China and Japan have unequal relations from ancient to modern days in relations such as center and tributary countries, as aggressors and semi-colonial nations. Those relations of the two countries have seriously influenced people’s conceptions of both countries. The cooperative relations in true sense begins in the minds of the people. In comparison to it, economic relations are limited to superficial cooperations. The economic relations can be easily interrupted depending on circumstances, or trade partners can be easily changed. Regional relations can be said after all as mental relations. In that sense, in East Asia, where wounds of the war have never fully recovered

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(symbolically shown by the “Yasukuni Shrine issue” and the “textbook issue”), the real way towards regional integration seems to be far from the creation. Based on the asymmetry, nationalism in East Asian countries has sometimes accelerated in various ways. The responsibility of China, whose rate of economic growth has been high, is very important. China as a potential superpower will be tried on how to eliminate the various asymmetries. Before China becomes a leader of the world in the future, China should improve its makings and ability, which it requires to be a leader of the region. We think that, in order to do it successfully, it might be better and more effective for China to stimulate other countries’ change through changing itself than letting other countries change by themselves.

2.2. Regional integration and Japanese strategy: Variety of arguments on the East Asian Community in Japan Until the end of the 1980s, Japan was never involved in any regional integration under the GATT system. However, international circumstance has been changed towards more regional integration particularly the EU and NAFTA. As often informed, arguments on the East Asian Community in Japan have started, as a matter of fact, around the beginning of the 21st century. Such arguments have been classified into four types, which are (1) pros, (2) pros in FTA, (3) skeptics, and (4) cons. Judging by them as of 2008, as far as the number of insistences, the pros arguments have made the major stream. Generally speaking, the pros arguments insist as follows: in the current movement towards integration within East Asian region, Japan undoubtedly has fallen far behind other East Asian countries in this respect, thus Japan should move towards catching-up with them. Or, because the East Asian Community has been an indispensable idea for Japan not to be sinking, Japan should actively take part in the movement towards an East Asian Community, which can be recognized from viewpoints of foreign policy.

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Regarding the (2) of pros in FTA, which is classified as (2) different from the above (1) because the pros in FTA do not automatically mean the pros of community, which arises from the big differences of integration between free trade area and community. They insist that, as far as the arguments on FTA (not on community) are concerned, completing the agreement of free trade area can make the GDP growth rates of member countries higher (compared with the non-member case). The third argument of (3) skeptics is, needless to say, asserting as follows: in order to create the integration of community, it is necessary to have common view of values and significant similarities among member countries as recognized in the EU. On the contrary, probable member countries of the East Asian Community have no such indispensable values and similarities. Thus, it seems to them that the idea of an East Asian Community is too early. The fourth argument of (4) cons means that the East Asian Community idea itself cannot be understandable. The argument is from their belief that the East Asian Community is a plan of China, which had wanted to be a leader of Asia, and Japan should not join such a plan. What is the typical argument of respective assertion? The essence of main assertion of the (1) pros argument was typically given by Ito (2005), in the foreword of which he mentioned as follows: when he attended the establishing assembly of NEAT (Network of East Asian Think Tanks, according to Ito, NEAT has roles to advise the way to create the East Asian Community for the summit conference of ASEAN plus three) in Beijing in September 2003, he was impressed with the atmosphere of enthusiasm towards creating the East Asian Community with saying that Ito felt the atmosphere similar to the Philadelphia Conference which was held in 1787 to make 13 independent states to unify the United States, and all the participants talked with each other not in their own countries’ languages but in the East Asian language. Finally, he straightforwardly mentioned that Japan will fall far behind other East Asian countries (pp. 2–3). Taniguchi, who asserts that a creation of an East Asian Economic Community and also its advanced type community as the East Asian Community, also stated in the foreword of Taniguchi (2005) that, in

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pushing forward with the plan of an East Asian Community, Japan should try for the East Asian regional integration with the East Asian original member countries in spite of suppression by the USA. If Japan is afraid of the US influence, Japan will fall behind the tendency towards Asian regional integration and Japan will have no friends among Asian region countries (pp. x–xi). Needless to say, many disputants do not insist about the same assertions, and there have been various insistences. However, their basic principles seem to be as follows: Japan should have the fundamental foreign policy towards, (1) the extroverted relations with foreign countries, (2) the stable and trustworthy relations with Asian countries, (3) the peaceful and friendly relations particularly with China, which are the bases for creating an East Asian Community. Thus, it is undoubtedly said that the precondition for the pros arguments is the peaceful and friendly relations with China. As a matter of fact, if the Sino-Japanese relations are hostile, any forms of community in the East Asian region will be extremely difficult to create. The (2) of pros in FTA insistence is as follows with Urata (2008). Urata emphasizes by the simulation analysis with the general equilibrium model that the effects of trade liberalization lead to the results saying, the wider regionalization of member countries and economic area, the higher GDP growth rates. Thus, he insists that Japan should play a leading role to create FTA consisting of ASEAN plus six, by promoting liberalization and structural reforms mainly focusing its attention on agriculture. Urata says that the wider region of ASEAN plus six than ASEAN plus three can contribute to higher GDP growth rate (Table 9.1).2 Apart from the issue of size of the region and the spaghetti bowl effects, basically there exists no serious doubt about the effects on trade liberalization3 (as insisted by, for example, Kemp and Wang (1976)). 2

According to Nakagawa (2007), Urata’s views should be classified to be (1) pros argument. However, in this chapter, as his assertion has attached more importance on the beneficial effects of free trade, we classify Urata’s views as (2) FTA pros argument. 3 As, for example, Bhagwati (1995) insists, there could be problems such as the term of FTA and the spaghetti bowl effect. See also the World Bank (2003). However, by and large, assertions about the effects coming from FTA and customs union have no serious problems.

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Table 9.1 The effects on the GDP growth rate by creating East Asian FTA (percent) ASEAN + 3

ASEAN + 6

0.4 4.7 3.6 5.7 −0.1 −0.1 −0.1 1.7

0.5 4.8 3.7 5.9 3.5 1.4 1.9 2.1

Japan China South Korea ASEAN India Australia New Zealand ASEAN + 6 Source: Urata (2008).

With regard to the (3) of skeptics assertion, needless to say, they have never denied the trade liberalization effects. They insist it is difficult at the present time, for the tendency towards the formation of an East Asian Community to recognized as positive. Watanabe (2006), for example, insists that he definitely supports the plan of making the East Asian region towards more FTAs because it has advantages. However, according to him, the support is limited to or does not go beyond the FTAs. He also asserts that, if the East Asian Community is created, its leader will undoubtedly be China, and the community will make Japan leave the USA. His way of thinking leads to the following: East Asia has still been a region covered by various nationalism power games like in the 19th century, and Japanese people should not talk about the community idea because Japan has no leadership to control the nationalism power (Watanabe, 2006, p. 218). Watanabe’s fundamental idea is based on the nationalism tendency in East Asia as we mentioned in this chapter and East Asian countries are not extroverted but strongly introverted. Komiya (1996) mentions that, in the East Asian region, it might not be possible at present to create a formal regional economic integration (pp. 7–8). He also insists, however, that the member countries, which consist of both APEC and WTO but of non-NAFTA member countries, create a group, and the group establishes a negotiating

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organization to check neither to erode the global free trade system nor to move to the protectionist way of EU and NAFTA. It can work well for the purpose of the WTO (p. 8). Hara (2005) asserts from viewpoints of neo-institutional approach. He states that the East Asian Community means that both Japan and China will intensify the unification in their structure of social order (p. 179). He also expresses, however, that economic institutions cannot be separable from custom and culture embedded in the society, thus, if custom and culture, etc., are different from each other, searching the simplification and unification is unreal, which means to create the community in East Asia is extremely difficult. What becomes clear from the assertions of Watanabe and Hara is that one of the main issues is the view on the Sino-Japanese relations. As mentioned previously, the common position of the (1) pros arguments is that the fundamental base of creating the community is to make Sino-Japanese relations peaceful and friendly. However, Watanabe insists that it is dangerous for Japan to move to the East Asian Community led by China, and also Hara asserts that it is unreal to intensify the simplification and unification between Japan and China because each of them have different custom and culture. Such views expressed by Watanabe and Hara (particularly Watanabe) will lead to the (4) cons arguments. Nakanishi (2006) insists typically about the (4) cons arguments. He argues that the undoubted winner of the East Asian Community is China, whose intention is to utilize economic power of Japan and South Korea for China’s development. China’s strategy has been built by well-analyzed recognition. On the contrary, with regard to the Japanese side, we cannot help saying that their strategic views are quite poor. Japan is easily caught in the Chinese trap. Nakanishi, thus concludes that Japan should not talk about the East Asian Community. According to Nakagawa (2007), the East Asian Community has been remade of the idea of the Greater East Asia Coprosperity Sphere originally insisted in 1940, which appeared more than 65 years later like a ghost (p. 163). Also, he asserts that the East Asian Community is not beneficial at all, but is a very heavy burden for Japan (p. 68). According to his way of thinking, the aim of the

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East Asian Community is to lead the US-Japan Alliance to natural extinction (p. 68). Nakagawa (2007) emphasizes the view from several points that the East Asian Community is coming from a Chinese intention. Sakurai (2004) also insists that it is impossible to cooperate in the sphere of currency, politics, foreign policy, security, etc., like EU among countries without sharing the sense of values of democracy. She says that a leading country of the East Asian Community is undoubtedly China, and it is doubtful that Japan can compete with China with regard to the East Asian Community activities. Also, Sakurai is apprehensive about removing the USA from the community plan, because Sakurai believes that in order to compete with the improved menace of China upon the sense of values, military, economy and politics, the most important thing for Japan is to strengthen its alliance with the USA. The insistences of Nakagawa and Sakurai share the recognition which emphasizes the importance of reinforcement of the US-Japan Alliance from viewpoints of the Japanese national strategy. Also, the assertions of Watanabe and Nakanishi share the position mentioning that Japan should not join the discussion on the East Asian Community because it is risky for Japan to compete with China by the Japanese poor strategic points of view. As previously mentioned, one of the main issues on the East Asian Community is on the Sino-Japanese relations; another one of the main issues on it is undoubtedly the relations of the East Asian region with the USA. There are assertions by, for example, Nakagawa and Sakurai that it is difficult to cooperate with China and the reinforcement of USJapan alliance is the correct way for Japan to choose on the one hand. There has been another way of discussion on the other hand saying that, as Taniguchi (2005) asserts, if Japan is frightened of the US influence, Japan will fall behind the tendency towards Asian regional integration and Japan will have no friends among Asian region countries. If Japan is confronted with the choice of either Sino-Japan relations or US-Japan relations, it is difficult to break away from ambiguous discussions without a clear criterion.

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However, if the promotion of East Asian Community plan is also beneficial to the USA, we can break away from the choice of SinoJapan or US-Japan relations. If it is correct, the main ground for the (4) cons argument (meaning damaging the US-Japan Alliance or of leading to the natural extinction of US-Japan Alliance) may disappear. Furthermore, as the pros arguments insist, the circumstances for Japan to be suppressed by the USA or to be frightened of the US influence are changed to be much easier for Japan. Such interesting insistence is given by Munakata (2006). We think that Munakata’s argument is backed by lots of knowledge and raises many interesting points. Her interesting argument, which says that national interest of both the USA and Japan has common grounds by creating the East Asian Community, is based on the following conditions4: (1) The future prospects of the Japanese economy depend on Asian dynamic development. It means that it is beneficial for the USA to encourage Japan to reform Japanese economic structure in order to compete with the Asian challenge. (2) As interdependence means mutual benefits for both sides, it has effects if both countries put more confidence in each other. The US security burden can be decreased. Also, if economic integration is created, more interactions of goods, capital, human resource, service (including ideas and culture) are promoted. Such interactions can contribute to the acceleration of mutual confidence. (3) If Japan can become a more reliable country for Asian neighbors, Japan can become a more valuable country for the USA as an allied nation. However, undoubtedly, if Munakata’s assertion can hold successfully, the USA, the benefiting country, will strongly approve the East Asian Community plan and will support the idea to create the community. The USA has never carried out such activities, thus we expect that the USA has never thought that the above assertion can hold.

4

The following assertions are found on the HP of RIETI (Research Institute of Economy, Trade and Industry), http://www.rieti.go.jp, particularly on 12 December 2006 (“Higashi Ajia Keizaitougou no Rekishi to Tenbou” — “History and Prospect of East Asian Economic Integration” — ), and Research & Review, March 2007 (“Higashi Ajia Keizaitougou no Rekishi to Tenbou” — “History and Prospect of East Asian Economic Integration” — ).

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As a matter of fact, extremely difficult conditions are necessary when we try to insist that the East Asian Community is beneficial for Japan, China and the USA. It goes without saying that Munakata does not expect the East Asian Community can be created easily. She insists that it cannot be attained unless probable member countries are drastically changed. What does “to be drastically changed” mean? According to Munakata, they are the following four: (1) It means a change from a group of introverted countries isolated by domestic protectionism and bureaucracy to a group of extroverted countries towards open and integrated market. (2) It means a change from a group of export-oriented countries dependent on the US market to a group of domestic demand-oriented countries. (3) It means a change from a group of immature and vulnerable economy countries against economic shocks to a group of mature institution economy which survive after competition and innovation. (4) It means a change from a group of countries which opposed each other by historic hostility and political conflicts to a group of countries which have a regional community with shared desires and mutual confidence. All of the four seem to be unrealistic at present as Munakata herself considers. After all, however, her main insistence expresses that Japan should become a country that is a trustworthy member for the East Asian neighboring countries, which is also beneficial for the USA. The comment which shows that Munakata herself thinks that the East Asian Community is extremely difficult to create is as follows: “East Asia will not be able to build a true community as long as China’s political system remains the same.” (2006, p. 182). (Thus, it is difficult to judge Munakata’s view is classified as (1) pros, (3) skeptics, or (3) cons argument). Similar thoughts are expressed by Hakogi (2008). Yanagida (2008) insists the way towards East Asian integration by considering the East Asian common currency (“Yuen” by him) and he expresses his view as follows: “When will China transform to a democratic nation state with multiple party system? The sooner China transforms to democratic system, the sooner East Asia creates common market” (pp. 93–94). Wu Jinglian argues his way in

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his review on the speech presented by D. North that, in order to break away from path dependence, “it is often necessary to be supported by outside influence, or to be introduced exogenous factors, or to change a government” (Wu Jinglian, 1997; see also Wu Jinglian, 2004). In other words, if the condition saying China’s political system will not remain the same is crucial for creating an East Asian Community, it is very difficult to create the community before emphasizing strengthening the US-Japan Alliance or establishing Sino-Japan peaceful and friendship relations. (We will not argue more about this topic). From viewpoints of Japan, even if it is unrealistic or extremely difficult to realize, Munakata expresses after all her hope by mentioning as follows: East Asian international circumstances have been changed significantly and a tendency towards institutional economic integration has been raised. Those are desirable on the one hand, and Japan will be confronted with serious tasks on the other. However, through such processes to try to create East Asian economic integration, Japan is able to restore the balance of a nation state and of a national society which Japan has lost since the end of the Second World War. Munakata’s insistence is summarized that Japan should become a trustworthy country for neighboring countries by attaching more importance to Asia, which is also beneficial for the USA. (Needless to say, it is another issue asking if the US strategy has about the same purpose as of Munakata.) We can recognize from our points of view the following three as more significant assertions, which are: (1) The assertion given by, for example, Komiya (1996). The East Asian Community can be considered as a positive functioned organization which can check not to move in the wrong way towards protectionism and introverted tendency of EU and NAFTA. It is a correct way for the primary purpose of the WTO to complete. As Komiya considers, for the time being, it might not be realistic for the East Asian Community to be created, but when it is created, it can be positively evaluated to promote free trade. This kind of assertion seems to be important because it leads us to correct relations among Europe (EU), the USA (NAFTA), Japan and China (East Asian Community).

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(2) The insistence by Munakata (2006), which says as just mentioned above that the national interest of both the USA and Japan has common ground by creating the East Asian Community. If the insistence of Munakata can become correct, both prerequisites of construction of a peaceful and friendly relations between China and Japan, and reinforcement of the US-Japan Alliance can exist without contradiction. Thus, the East Asian Community can be created successfully through the drastic changes (as insisted by Munakata). (3) The assertion by Hara (2005), whose position is usually called as the neo-institutionalist. The above-mentioned insistence by Munakata cannot be consistent with Hara’s assertion. From Hara’s points of view, which says that, as far as custom and culture is different, searching for the simplification and unification in the sphere of social order is unreal, the insistence of Munakata particularly in saying “to be drastically changed” is unreal. Thus, the creation of an East Asian Community is doubtful. Hara’s assertion is meaningful because he introduces the neo-institutional points of view in the analyses of creating a community. Undoubtedly in discussions of systemic transition, we have had assertions of path dependence. Thus, it seems reasonable to introduce the neo-institutional viewpoints when we argue the community issue closely related with China and Japan. Hara (2005) explicitly shows the important viewpoints. Our analysis in this chapter is closely connected with the above argument by Hara (2005) because it is a kind of extension of our analyses which have examined since several years ago, such as Chen and Morita (2005), Morita and Chen (2006). The difference between Munakata and Hara can be expressed by viewpoints of neo-institutionalist approach to be an issue whether or not it can be broken away from path dependence. If they are able to break away from path dependence by the drastic change (as mentioned by Munakata), the East Asian Community can be created successfully. On the contrary, if to intensify the unification of custom and culture is difficult (if path dependence of respective countries can be maintained), it is difficult to create the East Asian Community.

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We consider the issue from such viewpoints in the final section of this chapter.5

3. European Union: A Short EU History6 European integration has its history of being deepened and of being expanded, whose main movements after the Second World War started in 1951. It was to establish ECSC (European Coal and Steel Community). The main aim of the first stage of integration, establishment of ECSC, was to realize the renunciation of war between Germany and France (as publicly appealed by Robert Schuman, the then French Foreign Minister, as the Schuman Declaration7). Also, the purpose of ECSC was to create the common markets for steel and coal for the six countries, which were Belgium, France, Germany, Italy, Luxembourg, and the Netherlands, under the supervision of High Authority. (The UK did not participate in this community because it preferred its own sovereignty to the community’s unified behaviors.) As for the second stage, it began in 1957 when the six member countries signed the EEC (European Economic Community) treaty and EURATOM (European Atomic Energy Community) treaty. The above three communities united their board of directors and their committees to become EC (European Communities), which was, needless to say, towards further integration in areas such as economic, political and security. 5 Helpful papers for the debates on Asian integration were presented at the panel of the 49th ISA Annual Meeting held in San Francisco in 2008, which was organized by Yun Chen and Ken Morita, although their main topics may be slightly different from this chapter. With permission of the authors, we would like to partly mention about them. Jhee (2008) presented a paper on Northeast Asian Integration, in which he examined if public support for the integration could be recognized, and if they did, which fields were supported. According to Jhee (2008), fields to which South Korean public supported were (1) trade, (2) agriculture, and (3) security. Widodo (2008) investigated changes of comparative advantage structure in East Asia, in which he found that the comparative advantage structure of ASEAN countries showed similar tendency with that of Japan. On the details, see Jhee (2008) and Widodo (2008). 6 With regard to this section, the authors are indebted to Haba (2004) and Tanaka et al. (2006). 7 Tanaka et al. (2006), p. 18. There could be another view on this recognition, which insists that creating ECSC was mainly to defend the former USSR’s military threat which had overwhelming military power at the time. See Nakagawa (2007).

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Also, it is said that an important purpose of the European integration has been to advocate European independence against the USA through their unified behavior without friction among them. However, from the 1970s to 1985, it was what is called a dark age of integration, which was caused by the conflicts of nationalism (we refer to it here as the introversion of nation states), which was due to synchronized depression arising from the oil shock. The third stage started in 1985, and till 1993 their integration deepened towards a single market with free movement of goods, labor and capital. The fourth stage began with the Maastricht Treaty in 1993 which has introduced (1) common currency, (2) common foreign and security policy, and (3) cooperation on justice and home affairs, towards the EU (European Union). Also, the EU has enlarged with five times of expansions. Its first enlargement was mainly for the EFTA (European Free Trade Association) countries to participate in the EU in 1973, whose important event was the UK participation in the EU, and Denmark also participated because of its export of agricultural products to the UK. The other five EFTA countries signed the FTA agreement with EU. The second and third enlargement were towards southern expansion including Greece (1981), and Spain and Portugal (1986). The main driving force of their accession was the EU support for their activities of moving towards a democratic system (against dictatorship and communism), although conflicts on agricultural products between Spain and Portugal, and France and Italy occurred because of their own national interest. The fourth enlargement was towards northern expansion including Sweden, Austria and Finland in 1995. The three countries were former member countries of EFTA; however, because of several disadvantages of remaining in EFTA, such as difficulties for enterprises in EFTA to locate in the EU countries, they preferred participating in EU, although the other countries, i.e. Iceland, Liechtenstein, Norway, and Switzerland preferred being the members of EFTA. Finland is geographically close to former Soviet Union and it had other motives arising from the end of the Cold War, which were due to economic and security advantages.

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Eastern enlargements in 2004 and 2007 therefore have been the fifth, whose bases for accession of EU have been (1) freedom, (2) democracy, (3) market economy, and (4) Christianity. The newly joined 10 (2004) and two (2007) countries satisfy such criteria. However, economic disparities among EU countries undoubtedly have expanded, which have caused introversive (nationalism) movement among member countries. The deepening and enlargement of European integration, we think, shows that shared interests for member countries have exceeded their self interests which have covered areas such as economic, political, and security deeply based on common values for Europe. Its main driving force at the beginning was, as mentioned previously, to realize the renunciation of war between Germany and France. Also as shown in the southern and eastern enlargement, their enlargement of the community was to prevent from returning to military, dictatorial and communist regime. As confirmed above, their common sense of values are (1) freedom, (2) democracy, (3) market economy, and (4) Christianity. As far as East Asia is concerned, (even apart from Christianity) as long as common sense of values such as freedom, democracy and market economy occupy important positions, which prevent the return to military, dictatorial and communist government, European type of integration like the EU has been rather different from the Asian type of integration. At the same time, we should pay attention on widening the disparities among member countries by enlarging the community, which has made introverted nationalism exciting.

4. East Asia: De facto Integration It may not be easy to define East Asia scientifically. If we focus our attention on recent topics with regard to East Asian Community issues, however, it would be reasonable to define East Asia as what is called ASEAN plus three indicating China (including Hong Kong and Taiwan province), Japan, South Korea, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, Cambodia, although some other definitions would be taken into consideration several tables later.

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Table 9.2 Regional trade ratio (percent) East Asia

NAFTA

EU

Export 1980 2003

33.9 49.4

33.6 55.4

61.0 61.4

Import 1980 2003

34.8 58.6

32.6 39.9

56.9 63.5

Source: Urata (2005), p. 127.

East Asian region has been integrated in terms of international trade, which is usually called “de facto integration” (even not formally and institutionally integrated). The de facto integration has been clearly shown as regional trade ratio as is indicated in Table 9.2. In 2003, the regional trade to its overall trade (the regional trade ratio) in East Asia reached 49.4 percent in export and 58.6 percent in import, whose ratio in EU was 61.4 percent and 63.5 percent, and in NAFTA was 55.4 percent and 39.9 percent respectively.8 With regard to the trade (of import and export) ratio of each region to world trade (of import and export) in 2006, EU (former 15 countries)

8 Just for reference, according to JETRO (2007), each regional trade ratio from 1980 to 2006 of ASEAN plus three, ASEAN plus six and EU 27 is shown in Table A. It could be insisted that the difference between NAFTA and East Asia is not so significant, but the difference between the EU and East Asia has been rather substantial. However, generally, as regional trade ratio in East Asia has expressed a significant figure, we cannot say the judgment of de facto integration is wrong.

Table A. Regional trade ratio (percent)

East Asia NAFTA EU

1980

1985

1990

1995

1999

2000

2005

2006

2006/1980

30.2 33.8 61.6

30.2 38.7 59.9

29.4 37.9 67.1

37.6 43.1 67.7

35.4 48.5 69.0

37.3 48.8 67.3

38.9 46.1 67.2

38.4 44.2 66.9

1.27 1.31 1.07

Note: East Asia means ASEAN plus three, and EU indicates EU 27. Source: JETRO (2007).

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shared 34.6 percent (25 countries shared 38.0 percent), NAFTA shared 17.1 percent, and East Asia shared 25.34 percent, which indicate that the East Asian ratio was higher than NAFTA, even less than EU 15. The figures related with international trade point out close ties among East Asian countries. It is often said, as far as various kinds of difference in economic indices are concerned, East Asian differences have been much wider than the EU. Table 9.3, for example, shows per capita GNI (2005) and Gini index (various years). As it clearly points out, the ratio of top over bottom of per capita GNI in EU was 14, and in East Asia 100. Also with regard to the Gini index, its average in EU was 0.284, and in East Asia 0.385. Although East Asian region has much more difference than the EU, it shows close economic ties (international trade in particular) among them. It is said that the East Asian integration would be with functional approach compared with institutional approach for EU. In the field of economic integration, it means that the EU has been a typical case of “institutional integration” and Asian integration such as ASEAN and APEC could be interpreted as “functional integration.” Institutional integration is led by nation states and functional integration is led by enterprises.9

4.1. Example of de facto integration: Sino-Japanese trade compared with UK-EC trade As mentioned earlier in the short EU history, the UK did not participate in the ECSC in 1951 because it preferred its own sovereignty, and also preferred close relations with the Commonwealth of Nations. However, vertical trade of the UK with the Commonwealth was not developed compared with active horizontal trade among the EC countries, which expressed German and French GDP got ahead of UK GDP.10 The UK established EFTA in opposition to the EEC. However, EFTA member countries had already 9

See, for example, Tanaka et al. (2006), p. 32. Tanaka et al. (2006), p. 24.

10

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Table 9.3 Per capita GNI and Gini coefficient in East Asia and EU East Asia Japan China Korea, Rep. Indonesia Malaysia Philippines Singapore Thailand Brunei Vietnam Laos Myanmar Cambodia Hong Kong

Per Capita GNI ($)

Gini Coefficient

38980 1740 15830 1280 4960 1300 27490 2750 na 620 440 na 390 27670

0.25 0.45 0.32 0.34 0.48 0.46 0.43 0.40 na 0.35 0.35 na 0.40 na

Ratio (Top over bottom) 100

Average 0.385

EU Ireland UK Italy Austria Netherlands Greece Sweden Spain Denmark Germany Finland France Belgium Portugal Luxembourg Estonia Cyprus Slovak Rep. Slovenia Czech, Rep. Hungary Poland Malta Latvia Lithuania Bulgaria Romania —

Per Capita GNI ($)

Gini Coefficient

40150 37600 30010 36980 36620 19670 41060 25360 47390 34580 37480 34810 35700 16170 na na na 7950 17350 10710 10030 7110 na 6760 7050 3450 3830 Ratio (Top over bottom) 14

0.31 0.34 0.31 0.28 0.29 0.36 0.25 0.35 0.27 0.28 0.25 0.31 0.26 0.39 0.29 0.32 na 0.26 0.28 0.25 0.24 0.31 na 0.34 0.29 0.28 0.28 Average 0.284

Source: The World Bank, World Development Report 2006 (on Gini coefficient), 2007 (on per capita GNI).

opened their economies as most of them are small open economies benefiting from free trade, which shows that the EFTA establishment did not bring the UK enough competitive position against the EEC.

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EC USA Commonwealth

30 20 10 0 1960 1965 1970 1975 1979 1987 1996

Figure 9.1

Regional structure of the UK export

Source: Tanaka et al. (2006), p. 305.

The UK tried to accession to the EEC in 1961. France vetoed the UK accession because it was closely connected with the USA’s cautious position against the rise of Europe.11 Finally, the UK joined the EC in 1973. Figures 9.1 and 9.2 show regional structure of the UK international trade. It shows, in both ratios of export and import of the UK trade, the EC gained more and the Commonwealth less (the USA almost the same). While focusing on the close relations between the EC countries and the UK, we can take notice of Japanese export and import ratio with the USA and China which are shown in Figures 9.3 and 9.4. Around the years of the UK accession to the EC, the UK international trade structure attached greater importance to the EC countries. Regional structure of Japanese international trade expresses parallel tendency of placing greater weight on China in place of the

11

According to Tanaka et al. (2006), the USA passed the Trade Expansion Act of 1962. It meant that the President of the USA was endowed with the authority to implement a policy saying that export products by both the USA and EEC shared altogether more than 80 percent to world export would have zero custom duties. Thus, if the UK joined EEC, many manufactured products would have zero custom duties. The UK accession seemed to lead EEC customs union to be ineffective, which had a negative effect on the USA by EEC expansion become much smaller.

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60 50 40

EC USA Commonwealth

30 20 10 0 1960 1965 1970 1975 1979 1987 1996

Figure 9.2

Regional structure of the UK import

Source: Tanaka et al. (2006), p. 305.

35 30 25 20

China USA

15 10 5

19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

0

Figure 9.3

Regional structure of Japanese export

Note: China includes Hong Kong. Source: MOF (Japan), annual.

USA without any institutional integration process, which shows us the de facto integration tendency. Such clear tendency in the regional trade structure of Japan seems undoubtedly to display fundamental principle of Japan’s foreign policy, which regards international economic relations as the most important and has led to the de facto integration in Asia. As stated previously, from the 1970s to 1985, EU had a dark age of integration caused by the conflicts of nationalism whose base was synchronized depression in Europe. In order to avoid such a dark age

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China USA

15 10 5

19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

0

Figure 9.4

Regional structure of Japanese import

Note: China includes Hong Kong. Source: MOF (Japan), annual.

for integration, international order12 seems to be necessary, which is considered later.

5. The International Order as the Public Goods What is the definition of international order? Although there are many definitions, it is certainly as follows: The international order is the reverse side of war and conflict, namely a relatively peaceful situation.13 It is also undoubtedly insisted that such international order could be formed based on power balance between sovereign states (like 19th century Europe), and also based on one country’s monopolistic superiority or hegemony (like Asian “pay tribute system” before the Opium War). With regard to people who suffered from the chaos caused by war, the international order surpasses the war and the conflict situation (there could be different opinions on the issue 12

Assertion by Haba (2008) is interested in connection with this section’s view. Haba insists that, as a leader of integration among European countries, both the UK and Germany are not qualified, because the UK has been an isle country and Germany has been a losing country. Japan has had both the reasons. With the same way of thinking in Asia as in Europe, Japan cannot be a leader country of the Asian integration. 13 In this chapter, therefore, we think that international order might indicate much looser ties within the region than international regime.

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questioning what kind of order is the most superior. Generally speaking, it is better to realize equality, freedom, and democracy in the international or the regional international society which is similar in the domestic society), we might say that the international order is a kind of public goods which are necessary for most countries. Such public goods are essential for society, and should be provided by governmental organization and not by the market. They are, for example, defense, police, judicature, etc. The economic definition of “the public goods and services” are ones with “non-exclusiveness” (person who has not paid will not be excluded) and “non-competitiveness” (someone’s use does not hinder others’ use). It is not appropriate for private enterprises to provide public goods and services. Even if therefore international economic relations have been attached greater importance in foreign policy, such public goods as provided by governmental organizations like hegemonic country would be necessary. A similar situation also appears in the international society. For example, when two countries ally, strengthening security capability for one country indicates enhancement of the other country’s security. When therefore one powerful nation and other small countries form a multilateral alliance, small countries can strengthen their defense capability without much expense. Also, for instance, in international trade, when one country opens its market for free trade, it enables other countries to gain trade benefit. If the world has a common currency, it can effectively avoid the risk in international trade and investment, which promotes international trade and investment. As the above examples demonstrate, one country’s action can bring the benefit to other countries (with taking probable costs in some cases). International order is slightly abstract, but it is a kind of public goods. Buchanan (1975) presents an important concept of “The Limits of Liberty.” He points out that political and legal order is the public goods; disorder is the negative public goods. As Buchanan insists, democratic political system and economic system like currency system are social public goods. Namely, the components of social order are various legal-based systems, and the order constituted by the system is the public goods.

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Buchanan divided the decision-making of domestic society into “the constitutionalism decision-making” and “the policy-type decision-making,” of which the constitutionalism decision-making is referred to the safety control system in the international society, such as GATT (from 1 January 1995 it changed to the WTO) and the IMF. However, because it is unstable, in the international society, for each member’s attitude to make the decision-making by, for example, voting, the actual international order could be often formulated by the powerful nation (hegemony country). Certainly, the burden is also mainly taken by the powerful nation, and other members often become the “Free Rider.” After World War II, in the North Atlantic Treaty Organization (NATO) and the Development Aid Committee (DAC) and so on, some people raised objections (the greater nation, the heavier the burden). Olson (1982), however, asserts that as a greater nation gains more advantages from the order, bearing more burden is inevitable. According to history, the UK once built the hegemony system in which it led international order, and then the USA became the superpower which found the order after World War II.

5.1. The US factor in the order of East Asia With regard to the post-war international order, the Cold War occupied many years after World War II, in which the different regimes were established. Under the situation, “double wins” game, it was impossible that at least between the two sides, no matter what happened, the post-war international free trade system has permeated East Asia. At the same time, however, under a peaceful security system, several types of regional conflicts have occured in the East Asian region, such as the Korean Peninsula dispute, Taiwan problem, and the South China Sea territory conflict. The US presence within the region has had a stabilizer function with the East Asian military alliance and the corresponding US garrisons. The USA may trace that the East Asian military position has strengthened since the end of the 1940s. Needless to say, the Cold War intensified at the beginning of the 1950s and during the 10 years from 1946 to 1955, the USA spent

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US$33 billion for the Western European region, which shared 65 percent of the overall US expenditure (US$50.9 billion). Also, the USA provided US$9.7 billion for the Pacific Ocean and the Far Eastern region, whose ratio was around 19 percent. In other words, at that time, the Pacific Ocean and the Far Eastern region were less important than Western Europe in the strategic sense. Concerning the Pacific and Far Eastern region, several affairs stimulated the US presence, which for example were, in February 1950, Soviet formed the “Sino-Soviet Mutual Friendship Treaty,” and in June, the Korean War erupted. The USA had 34,000 people dead, 104,000 people wounded, and 5,200 people captured and missing. This caused the USA to strengthen its strategic policy against the Soviet Union, which was what is called the containment policy. At the first half of the 1950s, the USA strengthened its military alliance with the Asia Pacific region, which led to a series of treaties as shown in Table 9.4. The US military alliances in the Asia Pacific region have lasted more than 50 years and have gone through severe trials repeatedly in international circumstances. They have experienced the revision, the distortion, the approximate frame preserved. The most important one has been the Treaty of Mutual Cooperation and Security between Japan and the USA, which has made Japan secure. The US provision for international security system has been undoubtedly public goods. In 2004, with the whole world military deployment adjustment strategy of Pentagon, the USA had reduced South Korea’s garrison scale to one-third (first batch of 3,600 army officers were sent to Iraq). Table 9.4 US military alliance in the Asian Pacific region Year and Month

Treaty

1951 August September September 1953 October 1954 September December

US-Philippine Mutual Defense Agreement US-Japan Security Treaty ANZUS Treaty (USA, Australia, New Zealand) US-ROK Status of Forces Agreement Southeast Asia Treaty Organization US-Taiwan Mutual Defense Agreement

Source: Gomi and Takita (eds.) (1999).

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Although the South Korean national sentiment against the US (garrison) has surged in recent years, the nuclear issue with North Korea has never been solved and the US decision to withdraw has unavoidably caused South Korea anxiety. We think that the US presence in the East Asian region is due to significant demand by Japan, South Korea, Taiwan, etc., which seems that the US external factor has been deeply rooted in the East Asian countries’ own internal reason.

5.2. Introversion of East Asian countries What causes the US influence on the East Asian region even after the end of the Cold War? We think that the true reason lies in East Asian countries, namely the East Asian countries have been introverted which has caused the East Asian countries to lack independence. It has also caused less provision of public goods including the economic system, security system, etc., among East Asian countries which has caused serious conflicts among them. European countries have been demonstrating their independence and have been providing enough public goods. When compared to Europe, the East Asian countries seem lack independence, and they have to depend on the US support to have international order in the region. What then might be the root of the introversion? We think that generally speaking, the nationalism has never been completely reformed, which has made a big crevice behind them and has become estranged them from independent cooperation.14

6. The Principle of Nationalism The definition of nationalism by Schwantes (1974) is as follows: unified and independent consciousness, ideology and movement to pursue the creation of identical network of life circle, cultural 14

Chen (2005) investigates the introverted performance and its origin focusing its attention on Japan and China.

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circle and economic circle. As the characteristics are shared by members, nationalism is a kind of collective psychological condition and movement. Nationalism took a kind of ideological trend with the widespread cognition which was in Europe at the end of the 18th century. After the French revolution, nationalism became influential in international relations. In the 18th century Europe, mercenary soldiers for foreign countries were ordinary matter. Related with the narrow native soil and the nation-state, such nationalism grew in Europe and the USA in the 19th century. In Asia and Africa, however, it did in the 20th century. Nationalism originated in Western Europe, and then gradually proliferated all over the world. Kohn (1945) divides nationalism into two types which are “Western Europe” and “non-Western Europe.” The former is “primary” and the latter is “triggering.” The differences between them are the following two. First, “Western Europe’s nationalism” was a rather big but loose unit (medieval Europe’s universality) and it was gradually emphasized that its characteristics were towards “dissimilation.” It promoted technological innovation and industrial revolution. “Non-Western Europe’s nationalism” was just the opposite, whose characteristics were towards “assimilation” with the formation of the big dike to become a small region. Second, with regard to “Western Europe’s nationalism,” because the main carrier is the bourgeoisie, it has the ideas of bourgeoisie freedom, equality, and human rights. Meanwhile, “the non-Western Europe’s nationalism” places it in the international circumstance (19th century imperialist powers started to colonize movement) to decide that it cannot but press this kind of intrinsic enrichment, and it completed the independence and unification (saving the nation from subjugation). The 19th century to the first half of the 20th century was often called “the nationalism times,” and the second half of the 20th century was called “the nationalism period for conversion.” In the 19th century, nationalism brought the progress of international relations with receiving the comprehensive affirmation, because the members regarded the national states as with the highest loyalty, nationalism effectively prevented the countries from splitting them, namely nationalism played the formidable centripetal force. However nowadays, nationalism is divided. The emerging countries have been

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in political and economic independence, and nationalism has achieved that the colony revolted against the suzerain. But in developed countries, nationalism may be regarded as something bad.

6.1. Four stages of the principle of nationalism Etou (1966) divides the principle of nationalism into four stages: The infancy stage nationalism, the puberty stage nationalism, the prime stage nationalism and the mature stage nationalism. The infancy stage nationalism indicates that, under the condition which is not necessary to have recognition by international society, it can grow ethnocentric national consciousness, thought, and movement. Characterisitcs of this stage nationalism show that within the country, they have never completed their own life circle, cultural circle and economic circle. The remarkable examples occurred in various East Asian countries, like the Opium War, China’s Boxer Movement, North Korean Kim dynasty, Wei Zheng reprimands the evil movement, India’s mercenaries revolt, etc. The puberty stage nationalism shows the stage in which the nation states form nationalism. Examples of this nationalism are: post-Revolution France in which the old system was liberated, Japanese nationalism in Meiji days, and Turkey’s nationalism in Kemal Pasha days. In the puberty stage nationalism, nation state is independent and unified in which it is regarded as the highest value requesting the national absolute royalty. There were examples such as: Czarist government’s “Pan-Slavism,” and Fascism in Germany and Italy. Japan also presented the “Greater East Asia Co-prosperity Sphere” in which the puberty stage nationalism of Japan had been intensely introverted. In comparison with them, in Western Europe, because the nationalism carrier is the bourgeoisie, nationalism development has been with its democratic reform and the bourgeoisie freedom has been contained within Western Europe’s nationalism. After World War II, in various independent countries in Asia and Africa, the life circle, cultural circle and economic circle like in developed countries have been seldom implemented. To complete the

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national conformity, the advancement society, economic development becomes the national leader’s vital strategic duty. In such process, nationalism had widely started, and often passed the burden of domestic contradiction. Puberty stage nationalism completes the national independence, the unification, the prosperous and powerful goal, which requests the people to have absolute loyalty to the country. The prime stage nationalism displays that the inside and outside of the nation state have already been in the prime socially and politically. In other words, the life circle, cultural circle, and the community network are fully developed. The prime stage nationalism in the international society maintains under the well-balanced premise to consider own country’s benefit, namely to emphasize the national interest based on the rational way. In the country of prime stage nationalism, each entity of the nation-state has the function which automatically continues, and society’s equilibrium restores its ability; also, it cannot erupt into an extreme nationalist movement. Nowadays, the USA and European developed countries occupy it under such kind of condition. The mature stage nationalism refers to a vigorous nationalism movement, but one that calmly lives in international society at present. In the countries with this mature stage nationalism, they have integrated their society since many years ago. At present, their life circle, economic circle, etc., have been internationalized while keeping their culture independent. At the same time, the sense of belonging of the nation has been paid on the community closely related with the everyday life. For example, although in most of the advanced countries larger region autonomous bodies like prefecture, state and province have been powerful, in the Northern European countries authorized power has been transferred to lowest level local governments.

7. The Rise of Regionalism in East Asia 7.1. The characteristics of the traditional East Asian order Before undergoing “the western impact” in the middle of the 19th century, there was the traditional East Asian order which was so-called

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“pay tribute system” (a kind of regional international order) by China. How does the pay tribute system compare with contemporary international relations? The modern European international relations take the sovereign state (nation state) as the constitution unit, but the East Asian pay tribute system took dynasty country as the constitution unit. The former takes the sovereign equality as its premise in international system, but the latter takes the Chinese order as its premise of rank order. With regard to the characteristics of post-war East Asian international system, there have been different views. Some think that the East Asian international system quilt annexes to the US and European modern international system. Some others think that, in the East Asian original international system which lasts, it has also added the US and European modern international system, and has displayed the aspect which has coexisted two big systems. Also, others think that when East Asia takes the USA and Europe as the modern international system, the Asian original system effectively plays the role which resists and confronts, whose result expects that the US and European system effectively permeate into Asia to make the modern East Asian system. Investigation of Asian international system is necessary to pay attention on two characteristics. The first one is the so-called “heavy level nature,” and the second is the so-called “non-independency.” “The heavy level nature” is long-standing with the center-periphery structure. The center has contained “the heavy level nature” in the East Asian original international system. China (Xi’an, Beijing and so on) takes the entire of the East Asia pay tribute system; each dynasty also has its own obvious center. After the modern US and European international order was reached, the original heavy stratified center has the drifting, or a center splits up into many centers, even Asian substantive centers are possible far outside Asia, London, Paris, Washington, etc. It can be summarized that, when the original static center-periphery relations start the fluidization, the complication under this vein has some questions to be worth pondering. Should the East Asian traditional Confucianism cultural center be in mainland China? Providing “the line of wild geese in flight ranks pattern” center acts the leading function in Asia, should Japan be the

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Asian “economic center”? Should it also be the military and political center? With this fluidization, the “heavy level nature” is associated with the East Asian order of “non-independency.” The source of East Asian order of “non-independency” may universally exist as being introversion. The root of this kind of introversion, as is generally said, lies in the East Asian various countries’ “not to reform the nationalism” attitude. This attitude differs in the various countries’ origin and manifestation; roughly speaking, the longitudinal historical origin and the crosswise multiplicity (modernized level, ideology difference, etc.) has the complex dispute.

7.2. The rise of the East Asian regionalism: The possibility of the order change What is necessary to be added is, in the East Asian fluidization, the complication of “the heavy level nature” structure, is appearing in certain “cross-regional” or “sub-regional” economic cooperation system, like in ASEAN, APEC, EAEC economic cooperation system. At the same time, regional economic development cooperation such as “the Sea of Japan rim economic region,” “the Yellow Sea rim economic region,” “the South China rim economic region,” “both banks economic region,” “the Thai Bhat economic region” are also swift and powerful. These regional cooperative organizations and the system activities have broken the national boundary in the material sense, even the Asian regional boundary line contains the general character of openness. Has this kind of openness been formidable enough to break? Changes of the East Asian countries introversion help them to complete the nationalism shape, which moves towards the direction worthy of us paying attention? As is fundamentally said, nationalism is not only a kind of instinct sentiment, but also at the same time it has the function of a tool. The life circle, cultural circle, the community network altogether mean ethnic identity. It is similar to “the collective peacefully guarantees” effect, at the same time, it can also help to meet other kinds of necessity with which, for example, people can stop worrying (a function

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of tool). According to historical experience, the nationalism carrier possibly is the sole national community, also possibly the multinational community. Along with the expansion of regional conformity, the nationalism carrier also correspondingly expands. If Asian integration (its first is economic integration) progresses, this common physical ability in the economic development, the cultural approval, the security control is satisfactory in each nation state, then the various East Asian countries nationalism carrier can correspondingly shift towards the East Asian region as a whole. Since this may facilitate East Asian countries at present “not complete reforming nationalism” to be reformed, East Asian “internationalism” will appear. It means East Asian international order with independence will also be born. How and by whom is such procedure from nationalism towards internationalism implemented?

8. East Asian Internationalism and International Exchange We think that the fundamental motivation towards integration is to establish a mechanism transforming economic benefit into peace and order. Long-lasting stable relations among trading states whose main purpose is to get economic benefit seem to secure peace and order. As stated above related with the EU, less economic benefit might lead to a dark age of integration through nationalism movements. Taking into consideration effects of creating an FTA, we recognize economic benefit from more mobility of goods (free trade) along with Japan Economic Research Center (2001) as shown in Table 9.5, which indicates, in 2010, Japanese GDP would be 1.02 percent more by creating an FTA with ASEAN, South Korea and China. On the contrary, if an FTA was created among ASEAN and China without Japan, Japanese GDP in 2010 would also be 0.05 percent less. It can be said that although negotiations among possible member countries for FTA may be tough because of benefit allocation, FTA

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Table 9.5 FTA effects on Japanese GDP (2010; annual, percent) FTA Member Countries Japan, Singapore Japan, Singapore, South Korea Japan, Singapore, Mexico Japan, ASEAN, South Korea, China China, ASEAN Japan, China Japan, USA

GDP Change for Japan (percent) 0.07 0.14 0.10 1.02 – 0.05 0.78 0.99

Source: Japan Research Center (2001).

creation is beneficial in terms of GDP growth and FTA withdrawal is disadvantageous due to GDP loss as indicated in Table 9.5. The rise of the East Asian regionalism as mentioned above as from nationalism to internationalism is interpreted to be from Prisoners’ Dilemma case to Tit-for-Tat case (Axelrod, 1984), which emphasizes the importance of the reiterated behavior or communication in order to avoid the Prisoners’ Dilemma situation. Usually, Prisoners’ Dilemma is used by political theorists to “explain the contractarian-coercion conjunction at the root of the modern state, arguing that the state of nature is a Prisoners’ Dilemma in which individuals have a dominant strategy of defecting from common action but in which the result of this mutual defection is deficient for all” (Stein, 1983, p. 122). The “Prisoners’ Dilemma” is as shown in Figure 9.5. It is wellknown and we will not go into the details, but the essence of the scheme is that, for actor A, when actor B prefers B1, A prefers A2 as 4 > 3, and also when B prefers B2, A prefers A2 as 2 > 1. For actor B, when actor A prefers A1, B prefers B2 as 4 > 3, and also when A prefers A2, B prefers B2 as 2 > 1. This indicates that actor A always prefers A2 when A behaves based on self interest, and that actor B always prefers B2 when B behaves based on self interest. Therefore, when actors behave based on self interest, the equilibrium always reaches (A2, B2) and the outcome is (2,2). However, it is easy to recognize that for a society as a whole and for each actor the

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B2

A1

3,3

1,4

A2

4,1

2,2

Figure 9.5

Actor A

Prisoners’ Dilemma

Source: Stein (1986), p. 122.

outcome (3,3) coming from the equilibrium (A1, B1) would be better. The Prisoners’ Dilemma case has too strict conditions stating that, first, both actors have no communication (information is quite limitedly given), and second, the game is done once (reiterated game is not allowed). It is reasonable to assume that reiterated Prisoners’ Dilemma has another result, emphasizing reiterated communication is important to avoid the Pareto-deficient situation. A typical example of this is the Tit-for-Tat strategy insisted by Axelrod (1984). We suppose here to start the same payoff matrix of Prisoners’ Dilemma given by Figure 9.5 with allowing reiterated game. At the following stages, there can be three strategies for both players: (1) always cooperation, (2) cooperation and non-cooperation in turn, (3) always non-cooperation. With the above matrix, the expected benefit of each strategy shown as E1, E2, and E3, is simply indicated as follows15: E1 = 3 + 3 + 3 + 3 + … E2 = 4 + 1 + 4 + 1 + … E3 = 4 + 2 + 2 + 2 + … The above consideration expresses that strategy (1) is definitely superior to strategy (2) and to strategy (3) when reiterated games are 15

See, for example, Hargreaves, Heap and Varoufakis (1995).

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allowed, which shows as always, cooperation to be the dominant strategy to reach Pareto optimum. As Axelrod (1984) clearly pointed out, we can expect Prisoners’ Dilemma situation with Nash equilibrium of Pareto-deficient can be avoided by cooperation of players, leading to a Pareto optimum situation. The superior result is from communication and reiteration. Such game theoretic approach along with Axelrod (1984) suggests to us the importance of reiterated communication for countries to be more cooperative.

9. FTA and FDI Tendency of East Asia Compared with the EU 9.1. FTA tendency in East Asia With an assertion by Kemp and Wan theoretically assures Pareto-optimal equilibrium by forming customs union and free trade area,16 it can be interpreted as a reason why free trade area has been expanded since the 1990s, also once again shown in Table 9.5. Total number of FTA from 1948 to 1990 was altogether 30. However, for five years from 1990 to 1995, the total number increased to 79, and in 2000 it further increased to 155. As of July 2005, the total number reached 213.17 As far as the breakdown of FTA member countries is concerned, as of February 2005, it showed that FTA number between transition countries (TC) was 29 which was the most, between developed countries (DC) and less developed countries (LDC) was 26, between LDC was 21, between DC was 13, between DC and TC was six, and between LDC and TC was five. The many FTAs between TC were led 16

Kemp and Wan (1976) indicated that, “Either the pre-union equilibrium of the member countries is a Pareto-optimal equilibrium of the fictitious economy (that is, corresponds to a maximal point of the utility possibility set), or it is not; in the latter case, a preferred Paretooptimal equilibrium can be attained by means of lump-sum transfers among individuals in the fictitious economy” (p. 97), which is usually called as the Kemp-Wan assertion. Altogether, trade creation and trade diversion effect by forming customs union seems to be positive by lump-sum transfers among member countries. 17 See Urata (2005), pp. 158–159.

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by their attempts to join the EU, and also former socialist countries which had close economic ties in their socialist era have kept their close economic relations after the transition.18 It demonstrates that the EU accession for former socialist countries was a major reason to form the FTA. It indicates that transition economies need reform and open policies towards market-oriented economies, as China’s experience of high-speed economic growth after Deng Xiaoping’s reform and open door policy has shown. With regard to East Asia, ASEAN Free Trade Area (AFTA) was established in 1992, and ASEAN has become a center for the FTA network in East Asia. We have also recognized the delay of forming the FTA in Japan, China and South Korea. However, the tendency towards forming the FTA seems to include much more countries because, as indicated in Table 9.5, a country which left in the tendency while other countries formed FTA is definitely at a disadvantage with less GDP. The main purpose of forming the FTA is to promote trade and investment among member countries by establishing better circumstances for more mobility of goods, labor and capital.19 Also as is stated later, inward and outward FDI in East Asia has been less active than the EU, whose circumstance seems to become more active than years before with the establishment of FTA networks. The tendency towards forming FTA seems to cover much more countries because, as indicated in Table 9.5, a country which left in the tendency while other countries formed FTA is definitely in a disadvantageous position with less GDP. Such progress in integration among East Asian countries can be recognized to lead to more cooperation among countries in the region as reiterated communication takes them to Pareto optimal situation, from nationalism towards internationalism. The EU experience of the dark age of integration suggests that economic recession among member countries can easily raise their

18

Nihon Keizai Shinbun, 21 February 2007. As is usually said, the WTO undoubtedly has the same purpose; however, it includes much more member countries, which shows difficulty to quickly reach successful agreement. Thus, FTA has been preferred. 19

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nationalism. The tendency in recent years towards the FTA network in East Asia, particularly after the end of the 1990s has been contributed by high speed expansion of China’s economy and Japan’s economic recovery after the beginning of the 21st century. Thus, we can say that the East Asian FTA tendency is towards a more formal integration based on accumulated works of functional integration. Although it may be difficult to mention that the tendency is approaching to the EU type institutional integration within 10 to 20 years span, it surely is a movement towards a more formal and institutional integration. In other words, in this chapter, we can also say that the tendency towards further integration has been a process for transition economies both European and Asian, particularly China to incorporate in the world economy, even with different approach through institutional integration by European and through functional integration by Asia.

9.2. FDI tendency in East Asia: Comparison with the EU The recent trend of rapid increases of FTA has important characteristics, which is to establish advantageous circumstance for inward FDI. Based on FAT agreement with zero or very low customs duties, the member country of FTA can be a production base through producing within the country by inward FDI whose products are easily exportable to other member countries with almost zero customs duties. That will, needless to say, be advantageous for attracting inward FDI. Generally speaking, economic integration such as free trade area, customs union plays an important role for member countries to attract FDI (meaning capital and technology). As stated previously, with regard to international trade, the difference between East Asia and the EU may not be so big. However, as far as FDI is concerned, the difference may be much more. We think that this is because FDI activities need better institutional conditions. Political scientists usually called the institution-related factors as “regime.” We are here concentrating our attention on the concept of international regime which works to successfully integrate multiple fields

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and multiple countries. The term international regime has, as a matter of fact, various definitions. For example, John Ruggie defined a regime as “a set of mutual expectations, rules and regulations, plans, organizational energies and financial commitments, which have been accepted by a group of states” (1975). Keohane defined international regimes as “sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors’ expectations converge in a given area of international relations” (1984). The analytical target in this chapter is not the definition of international regime, and we define the term here as Keohane (1984) did. The argument on the nature of the benefit of moving to a regime is as follows. According to the realist’s view, a nation state is independent and behaves based on its self interest. An international regime would be formed with the self interest which the nation state has independently.20 According to the institutionalist’s view, compared to the realist’s view, the interdependent relations among nation states by which the institutional framework is formed (with some reasons), and the shared interest provided by the institutional framework is given great importance. The international regime would provide the order based on the shared interest. The institutionalist’s view gives reasons for maintaining a regime, but it does not give reasons for why a regime is formed. Also, the realist’s view gives reasons for why a regime is formed, but it does not explain reasons for maintaining a regime (that is, order could exist in international political economy for the long term). Therefore, according to the functionalist’s view, they take the realist’s view in forming a regime and the institutionalist’s view in maintaining a regime, and integrate both views.21 What are the benefits of forming an international regime from more specific viewpoints? We can point out the following four natures of benefit. The first benefit is to mitigate uncertainty. It might be a good way to recognize the nature of mitigating uncertainty in examining 20 21

See, for example, Stein (1983). Keohane (1984), p. 193.

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a typical “insurance regime.”22 An example of an insurance regime is a STABEX scheme (export earnings stabilization scheme), which is a scheme that includes fund pooling for preparing for export earnings’ reduction. The effect of mitigating uncertainty is to increase the expected benefit for individual actors by providing shared interest for a shock absorbing mechanism. The second benefit is to reduce the cost of gathering information. The main ways for the regime to reduce information gathering costs are the following two. One way is to establish an organization to gather information, to analyze information and to provide information so that functions that deal with information are improved. The other way is to promote a contract agreement and transaction because the regime formation would try to remove asymmetric information and to make negotiations and transactions easier.23 The third benefit is to introduce stability. As was shown, as a definition of the regime, it means sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors’ expectations converge in a given area of international relations. We could recognize that a regime has principles, norms, etc. The third benefit is closely related to the mechanism to converge the actors’ expectations and behaviors in a given area of international relations. That is to say, violation and destruction of the principles and rules of a regime would cause other countries to retaliate and would disgrace the international reputation of the country. In order to avoid the above costs, expectations and behaviors would converge in a given area of international relations towards principles, norms, rules, etc. The mechanism towards convergence results in the third benefit of stability by setting a regime. The fourth benefit is to reduce transaction costs. The benefit of a regime is less transaction costs for the following two reasons. One is that, as mentioned, the existence of a regime could save the cost of negotiation when nations need to negotiate over some specific issues because a regime provides common sets of implicit or explicit 22 23

Keohane (1983), pp. 167–170 and also see Keohane (1984), p. 193. As is well-known, this is the same topic discussed by Akerlof (1970).

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principles, norms, rules, and decision-making procedures. In other words, a regime could absorb the portion of fixed cost and countries in negotiation could reduce the marginal cost for negotiations and transactions. The other reason is that, as a regime provides principles and norms, etc., various issues in different fields could be linked. That is to say, unless a regime existed, each country would separate each issue and would have to start by establishing principles, norms, rules, etc., for each issue. By absorbing the problems and waste, a regime could reduce marginal costs for negotiations and transactions. That is, the effect of reducing transaction costs. Regime formation, which means as Keohane defined as “sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors’ expectations converge in a given area of international relations,” thus can promote factor mobility among the regime forming countries. We easily recognize the situation mentioned as definition of regime with the trend of foreign direct investment. Table 9.6 shows the ratio of inward and outward FDI amount in the EU and East Asia to the world total FDI amount. It indicates clear difference between the EU and East Asia, which shows, for example, 62 percent of EU and 15 percent of East Asia. Active FDI activities indicate active manufacturing production which shows the development level of the economies concerned. Thus, we have relative trend of FDI taking into consideration international trade, here we take export as an index. We have a relative figure of FDI

Table 9.6 Ratio of inward and outward FDI amount to the world total (percent)

EU East Asia

2001

2002

2003

2004

2005

2006

51.7 11.3

56.0 11.6

55.3 10.7

40.7 14.4

59.6 15.3

49.4 10.8

Note: East Asia has 10 countries and provinces which are Japan, China, South Korea, Taiwan, Hong Kong, Singapore, Indonesia, Malaysia, the Philippines, and Thailand. (In 2001 and 2002, neither Singapore nor Indonesia were included.) EU means former EU 15 countries because of continuity of statistics. Source: JETRO, annual.

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Table 9.7 Relative ratio of FDI

EU East Asia

2001

2002

2003

2004

2005

2006

1.43 0.49

1.53 0.49

1.47 0.46

1.10 0.59

1.70 0.62

1.43 0.43

Note: East Asia has 10 countries and provinces which are Japan, China, South Korea, Taiwan, Hong Kong, Singapore, Indonesia, Malaysia, the Philippines, and Thailand. (In 2001 and 2002, neither Singapore nor Indonesia were not included.) EU means former EU 15 countries because of continuity of statistics. Source: JETRO, annual.

70 60 50 EU

40

East Asia 30 20 10 0 2001

Figure 9.6

2002

2003

2004

2005

2006

Ratio of inward and outward FDI amount to the world total

Source: JETRO, annual.

through dividing its ratio by a ratio of export amount of respective area to world export amount. Table 9.7 presents relative figures. Table 9.7 displays one percent export (of world export) corresponds to how many percent FDI (of world FDI). It expresses clearly the difference of FDI activities between the EU and East Asia, whose ratio is around 1.4–1.6 in the EU and 0.5–0.6 in East Asia. Figures 9.6 and 9.7 display as figures what Tables 9.6 and 9.7 show respectively.

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1.8 1.6 1.4 1.2 EU

1

East Asia

0.8 0.6 0.4 0.2 0 2001

2002

Figure 9.7

2003

2004

2005

2006

Relative ratio of FDI

Source: JETRO, annual.

We think those Figures and Tables indicate the difference between functional integration and institutional integration. We recognize therefore that, the more FDI, the more institutional integration, the more internationalist sentiment. The relatively less active situation of FDI activities in East Asia than the EU indicates that there are various factors to hinder capital mobility among them, which shows a lack of regime, more transaction costs, etc.

10. The East Asian Community from Viewpoints of Neo-Institutional Approach In the above sections, we have investigated the situation of cooperation among East Asian countries compared with the EU. We recognize the Asian “functional integration” in comparison with the European “institutional integration.” We also recognize a similar tendency of international trade of the UK with Commonwealth Nations and the (then) EC when the UK joined the (then) EC,

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international trade of Japan with the USA and China after around the year 2000. It has pointed out the progress of “de facto integration”. We study the significant existence of the USA as the order providing agent in the region of East Asia and the significant introversion of East Asian countries, which means that in East Asia we need the transformation from “nationalism” to “internationalism” (from “introversion” to “extroversion”). It is easily recognized that, among East Asian countries, the tendency towards FTA has been accelerated, and trade ratio among inter-regional countries to the world total has become larger. However, with regard to FDI among inter-regional countries, there could become significant difference between the EU and East Asia. It suggests the existence of various risks in East Asian countries arising from the “introversion.” Such risks seem to be closely connected with custom, culture, history and institution, etc., as often pointed out in FDI issues. We think the problems lead us to those related with path dependence. Thus, the big difference between the EU and East Asia can be said, in other words, as the problems on path dependence. Thus, next, we examine the problems closely and investigate reasonable ways to view the East Asian Community. Needless to say, the neo-institutional approach has various insistences. Their usual classification points out the following three: (1) historic approach of institution, (2) rational choice approach of institution, and (3) sociological approach of institution. Historic approach means they attach greater importance on historic details, whose key concept is path dependence. This approach depends on the view that actors’ choice is seriously regulated by institution. Rational choice approach means a view that, apart from institution, actors’ choice is considered to be rationally decided by external elements (apart from institution), whose key concept is transaction cost. They think actors decide their choice rationally (meaning minimize transaction cost). Sociological approach indicates actors’ choice is not decided externally (based on rationality). Actors’ choice is decided by not only formal institution but also by various factors such as custom and culture, whose characteristics are therefore wider recognition of the concept of

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institution. The key concept of the sociological approach is thus also path dependence (which has wider meanings including custom and culture). The concept of path dependence simply expresses that it points out the circumstance saying inefficient institution can survive and continue to exist by historical details. Therefore, it is used to explain that efficient institution cannot be necessarily emerged. (As North explains, the evidence shows that, although the king and bureaucrats recognized the clear declining tendency of Spain, they could not change the path of Spain. Thus, Spain became a second rate nation from the most powerful nation in the Western world in the 17th century (North, 1990). Also as North describes, in order to construct path dependence in terms of institution, two conditions are necessary, which are (1) increasing returns and (2) imperfect market. Thus, there have neither existed increasing returns in terms of institution nor imperfect market; institution will lose its importance. In the world with decreasing returns, various circumstances will converge in a certain stable situation sooner or later. Also in the market with complete competition, the inefficient institution will be eliminated or adjusted because of their survivability. Thus, the existence of path dependence can be explained by increasing returns in terms of institution and by imperfection of the market. Also therefore, even if the institution is not efficient and other alternative more efficient institutions can exist, it does not automatically mean a change of institution could have occurred. Even if the institution is less efficient, because the self-reinforcement mechanism on it can be promoted (Arthur, 1994), the less efficient institution can survive, which leads to the situation of path dependence. With regard to Munakata’s insistence, serious prerequisites of her argument are necessary for probable member countries to change drastically, whose results lead to the successful creation of the East Asian Community. We can expect that to be changed drastically means a change of institution (including custom and culture). Concerning Hara’s assertion, it is unreal to expect changes of custom and culture

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to occur and to move towards unification and simplification in the sphere of social order among probable member countries particularly between China and Japan. The heart of the issue is thus to ask if it is possible to break away from path dependence. According to the explanation by North, it can be insisted that the issue is to inquire if it is possible to break away from both conditions of increasing returns and imperfect market or not. Thus, in Munakata’s way of explanation, by being drastically changed in a respective country’s institution, which means by removing increasing returns in terms of institution and by becoming competitive of the market, the importance of institution is lost and breaking away from path dependence can be possible. However, in Hara’s argument, because it is difficult for a respective country to change drastically, it cannot break away from both increasing returns and imperfect market. It shows us therefore that they cannot leave path dependence. When we consider the East Asian Community from the viewpoints of neo-institutional approach, particularly in sociological approach of institution, do we need to assume that actors’ choice is regulated by institution? In other words, is it necessary for us to examine the issue from the viewpoints of rational choice approach of institution? As stated previously, according to the rational choice approach of institution, actors decide their behavior to minimize the transaction cost. In considering the issue on East Asian Community, each actor points out each country such as Japan, China, etc., examining the issue from the viewpoints of rational choice approach of institution means to suppose that respective country behaves rationally to minimize transaction cost. Undoubtedly, as mentioned previously, it is extremely difficult to examine the issue on East Asian Community without investigating Sino-Japanese relations. The Sino-Japanese relations have several indepth problems such as historic understanding and patriotic education. Also as China has, as a matter of fact, the one-party system and it is a socialist country in the formal sense, it is unrealistic to consider the issue without institutional investigation. Due to increasing returns and imperfect market, the institution becomes a crucial factor and we should focus our attention on path

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dependence in lots of spheres. For example, we have an assertion saying that it is supportive to insist that the Japanese FDI scale in China may be comparatively small (Morita and Chen, 2006). The elements to hinder Japanese FDI in China undoubtedly are not the results of rational choice but result from differences of custom and culture, which lead to China’s risk for FDI activities. It is described in this chapter as the difference of relative ratio displayed in Table 9.7 (meaning that one percent trade of world trade corresponds to how many percent FDI of world FDI), which expressed as previously the difference of FDI activities between the EU and East Asia (whose ratio is around 1.5 in the EU and 0.5 in East Asia). Therefore, in this chapter we think it should be assumed that actors’ choice is not decided independently from institution (including custom and culture) in East Asia. As stated repeatedly, once path dependence is recognized, it is not easy to break away from the institutional importance. Then what are necessary to break away? As a matter of fact, the necessary conditions are what we have mentioned previously in this chapter. Just for reference, we have here a short look at the discussion which shows what the necessary conditions are, because we think that appropriate discussions are given by Munakata as previously stated. The drastic change (emphasized by Munakata) towards the East Asian Community can be interpreted in this chapter to be the change of breaking away from path dependence. Expressed simply, they are: (1) extroverted oriented change, (2) domestic demand led growth, (3) economy with strong institution, and (4) towards regional community depending on mutual confidence and shared desire. Such drastic changes make the East Asian Community plausible by breaking away from path dependence, which also make decreasing returns and competitive market possible. In our way of explanation, they are changes (1) from nationalism to internationalism (which should include structural reform in domestic economy and industrial reform of comparative disadvantageous industry like agriculture in Japan), (2) from introverted activities to extroverted activities, and (3) positive construction of regional order by positively promoting international exchange.

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Thus, when it is expressed by drastic change (by Munakata), by intensifying the unification in the sphere of social order (by Hara), by necessity of support of outside influence or of change of government (by North, and Wu Jinglian), they are the same as our way of expression as transformation from introverted activities to extroverted activities, from nationalism to internationalism,24 which are descriptions suggested in the previous sections in this chapter.

11. Conclusion We can conclude here in this chapter as follows: (1) In the East Asian region, we can recognize the de facto integration or functional integration compared with the institutional integration of the EU. (2) Creating the East Asian Community or such community in Asia can be considered as a positive functioned organization which can check not to move the wrong way towards protectionism and introverted tendency of the EU and NAFTA. It is a correct way for the primary purpose of the WTO to complete. We think it is correct to recognize the relations between globalization and regional integration as functions such as checking to move towards a wrong way. (3) We can also recognize a similar tendency of international trade of the UK with Commonwealth Nations and the (then) EC when the UK joined the then EC, and international trade of Japan with the USA and China after around the year 2000. It describes the progress of de facto integration. (4) We understand the significant existence of the USA as the order providing actor in the East Asian region and the significant introversion of East Asian countries. We think it means that in East Asia

24

Transformation from “introverted strategy” to “extroverted strategy” which we assert here seem to be about the same insistence of the “evolution of cooperation” by Axelrod. Because the strategy asserted by Axelrod means that they can get benefits mutually by cooperation and not by isolated actions.

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(5)

(6)

(7)

(8)

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we need the transformation from “nationalism” to “internationalism” and from “introversion” to “extroversion.” It is easily recognized that, among East Asian countries, the tendency towards FTA has been accelerated and the trade ratio among inter-regional countries to the world total has become larger. However, with regard to FDI among inter-regional countries, there could become significant difference between the EU and East Asia. It suggests the existence of various risks in East Asian countries mainly arising from the “introversion.” From the viewpoints of neo-institutional approach, it seems to be difficult to think that the East Asian Community can be created in the near future because breaking away from path dependence of (probable) member countries particularly of Japan and China is difficult, because the custom and culture, etc., are significantly different. From the viewpoints of neo-institutional approach, in order for East Asian region countries to break away from path dependence, it is indispensable to transform from introverted activities to extroverted activities, from nationalism to internationalism.

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