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).