Asia's Borderless Economy: The Emergence of Sub-Regional Zones

Asia’s borderless economy: the emergence of subregional economic zones Edited by Edward K.Y. Chen and C.H. Kwan

ALLEN & UNWIN

Copyright © Edward K.Y. Chen and C.H. Kwan 1997 Copyright © individual authors 1997 All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. First published in 1997 by Allen & Unwin 9 Atchison Street St Leonards NSW 2065 Australia Phone: (61 2) 9901 4088 Fax: (61 2) 9906 2218 E-mail: [email protected] Web: http://www.allen-unwin.com.au National Library of Australia Cataloguing-in-Publication entry: Asia’s borderless economy: the emergence of subregional economic zones. Bibliography. Includes index. ISBN 1 86448 449 7. ISBN 1 86373 664 6 (pbk.). 1. Asia—Economic conditions—1945–. 2. Asia—Economic integration. 3. Asia—Economic development. I. Chen, Edward K. Y. II. Kwan, C. H., 1957– . 338.90095 Set in 10/11pt Sabon by DOCUPRO, Sydney Printed by KHL Printing Co Pte Ltd, Singapore 10 9 8 7 6 5 4 3 2 1 Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the relevant copyright, designs and patents acts, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publisher. eBooks Corporation

Contents

Figures Tables Abbreviations Contributors

iv vi viii x

1

The emergence of subregional economic zones in Asia Edward K.Y. Chen & C.H. Kwan

1

2

The South China Economic Zone Joseph Siu-Lun Lee

3

The Northeast Asian Economic Zone: potential for the latecomer Yukiko Fukagawa

59

4

Growth triangles in Singapore, Malaysia and ASEAN: lessons for subregional cooperation Lee Tsao Yuan

89

28

Appendix to chapter 4: The Riau Islands: development in progress 124 Junko Fukuda 5

The Indochina Economic Zone Osamu Yasuda and C.H. Kwan

136

6

Towards a borderless economy in Asia C.H. Kwan

152

7

Conclusion Edward K.Y. Chen

178

Index

182

Figures

1.1 The Asian countries’ current levels of economic development (comparison with Japan and South Korea) 1.2 The flying-geese pattern of shifting comparative advantage 1.3 Expanding new frontiers of the Asian economies 1.4 China’s economic performance since 1979 1.5 China replaces the United States as Hong Kong’s engine of economic growth 1.6 The gain from foreign direct investment 1.7 Expansion of new frontiers and macroeconomic performance 3.1 The evolution of relations in Northeast Asia 3.2 The area for Tumen River Area Development Program 4.1 The Johor–Singapore–Riau Growth Triangle 4.2 Some proposed growth triangles in ASEAN 5.1 The Greater Mekong Subregion 6.1 Desynchronization of Asian and US growth rates 6.2 Weakening linkage between Asian and OECD growth rates 6.3 Greater China as a trading power (exports and imports) 6.4 Foreign exchange reserves of Greater China 6.5 Asia’s rising share of world trade 6.6 The growing importance of intra-regional trade 6.7 Asia as Japan’s largest export destination 6.8 Asia as Japan’s largest source of trade surplus 6.9 The yen–dollar rate and Asian economic growth 6.10 Stronger yen favouring exports of heavy-industry products (South Korea) 6.11 The Asian NIEs as a built-in stabilizer for Japanese exports

4 6 11 12 17 22 24 60 73 90 91 144 153 154 156 156 158 159 160 160 162 165 170

FIGURES

6.12 Strengthening correlation between Asian currencies and the yen 6.13 Multilateral economic cooperation in the Pacific region

v 173 175

Tables

2.1 Estimates of GDP, South China Economic Zone, 1961–94 29 2.2 Factor endowments in Hong Kong and Taiwan 33–4 2.3 Factor endowments in southern China 38 2.4 Export shares and revealed comparative advantage (RCA) indexes 42 2.5 Foreign direct investment in the Yangtze region and the South China Economic Zone (US$mil.) 51 2.6 Japanese foreign direct investment (US$mil.) 52 2A.1 Hong Kong’s capital stocks (method 1) 54 2A.2 Hong Kong’s capital stocks (method 2) 55 2A.3 Actual capital stocks vs estimated capital stocks 55 3.1 The Republic of Korea’s trade with China and Russia (US$mil.) 63 3.2 Direct investment by Japan and the Republic of Korea (US$mil.) 64 3.3 Japan and the Republic of Korea’s investment structure in China by region and industry (% share by cases) 65 3.4 The Republic of Korea’s trade with China and Russia (US$mil.) 66 3.5 China’s border trade in Northeast Asia (US$mil.) 71 3.6 Change of trade flow in exports in Northeast Asia (US$mil.) 77 3.7 Japan’s trade with the Republic of Korea and China (US$mil.) 79 4.1 Singapore: average monthly earnings for all workers, 1981–94 94 4.2 Singapore: property price trends, 1980–91 (S$ per square metre) 95

TABLES

4.3 Batam: main economic indicators 4.4 Statistics on total investment in Batam Island as at June 1995 4.5 Foreign investment by home country in Batam Island as at December 1992 4.6 Visitor arrivals to Indonesia by nationality and port of entry, 1988–91 4.7 Johor: basic facts and GDP growth rates by sector, 1989–93 4.8 Malaysia: total proposed capital investment in manufacturing projects by state (M$mil.) 4.9 Malaysia: approvals granted for establishment of manufacturing projects by state 4.10 Johor: sources of foreign equity in approved projects (M$mil.) 4.11 Singapore: value added by sector at current prices (S$mil.) 4.12 Singapore: employed persons aged 15 years and over by industry (’000) 4.13 Singapore’s trade with Malaysia (S$mil.) 4.14 Indonesia’s trade with Singapore (US$mil.) 4A.1 Development history of Riau Islands 4A.2 Comparison of Riau Islands 4A.3 List of major development projects, Riau Islands 4A.4 Number of companies operating in Batamindo Industrial Park 4A.5 Japanese companies operating in Batamindo Industrial Park (October 1994) 5.1 Economic performance of the Indochinese states 5.2 Economic cooperation in the Greater Mekong Subregion—major projects in the transport and energy sectors (US$) 6.1 Emergence of the Chinese Economic Area as a global power (gross domestic product) (US$trillions) 6.2 Ranking of leading container ports, 1994 6.2 Attractive countries and regions for new Japanese investment 6.4 Japan’s direct investment in the Asian countries

vii 102 103 103 104 107 109 110 112 113 114 115 116 125 126 127 129 131 140 146 155 157 166 167

Abbreviations

ADB AFTA APEC ASEAN BIBF BIP BKPM CMEA DPRK EAEC EAGA EO FDI GDP GLC GNP GSP HCI HCIG ICOR IS JETRO JSR KEDO KOTRA MFN NAFTA NEA

Asian Development Bank ASEAN Free Trade Area Asia-Pacific Economic Cooperation Association of Southeast Asian Nations Bangkok International Banking Facility Batamindo Industrial Park Badan Koordinasi Penanaman Modal (Investment Coordinating Board, Indonesia) Council for Mutual Economic Assistance Democratic People’s Republic of Korea East Asian Economic Caucus East ASEAN Growth Area Export Orientation Foreign Direct Investment Gross Domestic Product Government-Linked Company Gross National Product Generalized System of Preferences Heavy and Chemical Industry Human Capital Intensive Goods Incremental Capital–Output Ratio Import Substitution Japan External Trade Organization Johor–Singapore–Riau Korea Energy Development Organization Korea Trade Promotion Corporation Most Favoured Nation North American Free Trade Agreement Northeast Asia

ABBREVIATIONS

NET NIE NRI NT$ ODA OECD PCIG PUB R&D RCA RMB ROK SCEZ SITC SLORC TEIG TRADP ULIG UNDP UNTAC

Natural Economic Territory Newly Industrializing Economy Nomura Research Institute New Taiwan dollar Official Development Assistance Organization for Economic Cooperation and Development Physical Capital Intensive Goods Public Utilities Board (Singapore) Research & Development Revealed Comparative Advantage Reminbi (China’s currency) Republic of Korea South China Economic Zone Standard International Trade Classification State Law and Order Council Technology Intensive Goods Tumen River Area Development Project Unskilled Labour Intensive Goods United Nations Development Program United Nations Transitional Authority in Cambodia

ix

Contributors

Professor Edward K.Y. Chen, educated at Hong Kong University (B.A., M.Soc.Sc.) and Oxford University (D.Phil.), is currently President of Lingnan College in Hong Kong. From 1979 to August 1995, he was Director of the Centre of Asian Studies at the University of Hong Kong. He has held visiting appointments at Yale, Oxford, Stockholm University and the University of California. He was a member of the Legislative Council of Hong Kong in 1991–92, and a member of the Executive Council of Hong Kong, the highest policymaking body of the Hong Kong Government. Professor Chen is a pioneer in studies on newly industrialized economies, publishing Hyper-Growth in Asian Economies (Macmillan Publishers) in 1979. He also published Multinational Corporations, Technology and Employment (Macmillan Publishers) in 1983, The New Multinationals (John Wiley) in 1983, Foreign Direct Investment in Asia (Asian Productivity Organization) in 1990, and Transnational Corporations and Technology Transfer in Developing Countries (Routledge) in 1994. Yukiko Fukagawa is a senior economist at the Long-Term Credit Bank Research Institute in Tokyo. She spent ten years with the semi-official Japan External Trade Organization as a researcher before moving to the current position. She has an M.A. degree from Yale University in international and development economics. She has served as a visiting fellow in the Korea Institute for Industrial Economics and Trade (KIET) in Seoul and the Centre of Japanese Economy and Business of the Columbia University. She has published many books and articles in Japanese on the Korean economy. Junko Fukuda is an economist at the Nomura Research Institute (Singapore). She studied economics at the Keio University in Tokyo. Since joining NRI in 1990, she has been following the economies of Singapore, Malaysia and Indonesia.

CONTRIBUTORS

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Dr C.H. Kwan is a senior economist at the Nomura Research Institute in Tokyo. Born in 1957 in Hong Kong, he studied economics at the Chinese University of Hong Kong and the University of Tokyo where he received his PhD degree. He spent a year with the Hong Kong and Shanghai Bank as an economist before joining the Nomura Research Institute in 1987 where he served as Head of Asian Research from 1992 to 1994. He is the author of Economic Interdependence in the AsiaPacific Region—Towards a Yen Bloc (Routledge, 1994) and The Economics of a Yen Bloc (in Japanese, Nihon Keizai Shimbunsha, 1995). Joseph S.L. Lee is currently Research Officer of Legislative Council Secretariat in Hong Kong. He was Research Officer in the Australian Consulate General in Hong Kong from May 1993 to July 1995, and Research Manager of the Hong Kong Monetary Authority from August 1995 to April 1996. He received his M.A. in Economics from the University of Warwick and M.Phil. from the University of Hong Kong. Dr Lee Tsao Yuan is Director of the Institute of Policy Studies (IPS), a non-government public policy think-tank established in 1987. She was appointed Consultant, International Economics Directorate, Ministry of Foreign Affairs, Singapore, in February 1996. She served as Singapore’s APEC Eminent Persons Group representative in 1994–95. She is Singapore’s representative to the ASEAN-EU Eminent Persons Group. She has been a Nominated Member of Parliament since September 1994. She obtained a First Class Honours degree in Economics and Statistics from the then University of Singapore in 1978, and her PhD in Economics from Harvard University in 1982. Her publications include two books which she co-authored, The Singapore Economy Reconsidered (1986) and Local Entrepreneurship in Singapore: Private and State (1990). She is also editor and co-writer of Growth Triangle: The Johor–Singapore–Riau Experience (1991). Her most recent book is Overseas Investment: Experience of Singapore Manufacturing Companies (1993). Osamu Yasuda is counsellor of the Nomura Research Institute. He was Deputy Director of Economic Research Institute of the Economic Planning Agency before joining NRI in 1992. He has served as an economic advisor to the governments of Thailand and Mongolia. He is the editor of Vietnam, Laos and Cambodia, the Path to Economic Development (Sasakawa Peace Foundation, 1993) and various books and articles on economic development in Thailand and Mongolia.

1

The emergence of subregional economic zones in Asia Edward K.Y. Chen and C.H. Kwan

The pattern of economic development in post-war Asia has been likened to a flock of wild geese flying in formation. The development process began in Japan, rippling out to the Asian NIEs and later to the ASEAN economies and China. Traditionally these economies have depended heavily on the United States for trade and investment but the trend towards intra-regional economic interdependence has accelerated since the Plaza Accord in 1985. Prompted by the yen’s appreciation, the inflow of Japanese investment has surged and fluctuation in the yen–dollar rate has become a major factor determining macroeconomic performance not only in Japan but also in other Asian countries. The ending of the Cold War, as symbolized by the fall of the Berlin Wall in 1989 and the dissolution of the Soviet Union in 1991, has also promoted the integration of the socialist countries (China, Vietnam, Cambodia, Laos, Myanmar, Mongolia, North Korea and far east Russia) into the regional economy. Various subregional economic zones stretching across national borders have emerged in this process. While strengthening ties among the Asian economies have until now been achieved mainly through the initiative of the private sector, multilateral economic cooperation at the government level is also gaining momentum. In this book we study this new pattern of economic interdependence in Asia by focusing on the subregional economic zones. This chapter gives an overall view of the issue and the following four chapters look more closely at recent developments in individual subregional economic zones. Other aspects of deepening intra-regional interdependence ranging from Asia’s transition to self-sustaining growth, 1

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the effects of the yen’s appreciation, the policy issue of regional trading blocs and Japan’s ‘hollowing out’ problem will also be discussed. Flying geese, new frontiers and subregional economic zones Since the late 1980s, a number of subregional economic zones, each encompassing countries at different levels of economic development and with different political systems, have emerged in Asia. A typical example is the South China Economic Zone where investment from Hong Kong and Taiwan is transforming Guangdong into a major industrial region in China. The development of these subregional economic zones is helping to integrate socialist countries into the regional economy and transform Asia into a borderless economy. This chapter summarizes the emergence of subregional economic zones, their current state of development and their economic impact on the participating countries. The following factors have contributed to the emergence of subregional economic zones in Asia: 1 2 3 4 5

geographical proximity; high complementarity in economic structures among the participating countries; outward-looking development strategies in the participating countries; the end of the Cold War and acceleration of economic reform and open-door policies in the socialist countries; and the decentralization of political power.

The emergence of subregional economic zones can be interpreted along the lines of the flying-geese pattern which has been widely used to describe the propagation of the wave of industrialization in Asia from Japan to the Asian Newly Industrializing Economies (NIEs) and further to the ASEAN countries since the 1960s. Indeed, the first three factors mentioned above are usually cited as preconditions for realizing the flying-geese pattern of sustained dynamism in Asia. Until the first half of the 1980s, the third condition (namely, an open economic system), had not been met by the socialist countries, but the subsequent shift in their development strategy (factor 4) sharply changed the situation. Political and economic barriers hindering economic cooperation are breaking down rapidly, making it possible for Asia’s traditional high-growth economies to expand their new frontiers into the socialist countries. Subregional economic zones have emerged in places where the conditions for the expansion of new

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frontiers (factors 1 to 4) are most readily met, and they have been further promoted by the trend towards decentralization of political power in the large countries (factor 5). Characteristics of the Asia-Pacific economy The Asia-Pacific economy can be characterized by dynamism in economic growth, heavy dependence on international trade and investment, and diversity in the level of economic development and in the economic systems among countries in the region. The Asia-Pacific region has been the most dynamic part of the world economy throughout the postwar period. Through trade and investment, the wave of industrialization that spread from Japan to the Asian NIEs in the 1960s is now spreading to ASEAN and China. Economic growth in the Asian NIEs averaged over 8 per cent a year over the last three decades despite two oil crises in the 1970s, a sluggish world economy in the first half of the 1980s and rising protectionism and currency appreciation in the latter half of the 1980s. Economic growth in the ASEAN countries, which had lagged far behind the Asian NIEs until the mid-1980s, has picked up since the latter half of the 1980s, thanks to the rapid increase in foreign direct investment. Economic growth in China has accelerated since the late 1970s when the government shifted to an open-door policy that promotes foreign investment and exports. Those Asian countries which experience rapid growth have very open economies, reflecting their development strategy of promoting the inflow of foreign capital on the supply side and exports on the demand side. This contrasts the import-substitution strategy pursued by most Latin American countries. Merchandise exports as a percentage of Gross National Product (GNP), for example, is much higher than in other parts of the world. As a result, economic performance in these countries is highly vulnerable to developments beyond their national borders. In the past, the world (or US) economic growth rate had the largest effect on Asian economic growth. Recent changes in the pattern of trade and investment, however, have shifted the major determinants of economic performance in the Asian countries to more regional factors. The Asia-Pacific region consists of countries with levels of economic development ranging over a very wide spectrum. Japan, with a GNP of US$5110 billion and a per capita GNP of US$40 700 in 1995, is a global power. Hong Kong and Singapore, the two city-states and trading and financial centers of the region have per capita income higher than that of Australia. At the other end of the spectrum, China, Indonesia and the Philippines only have per capita

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GNP of less than US$1000, a level considered relatively low even by the standards of the developing countries.1 The levels of per capita GNP (in real terms) of the Asian NIEs in 1994 corresponded to that of Japan between 1972 (for South Korea) and 1989 (for Hong Kong), while the gap between the ASEAN countries and South Korea ranged from eight years (for Malaysia) to twenty-six years (for Indonesia). Likewise, China’s per capita income in 1994 is estimated to have reached South Korea’s 1965 level (see Figure 1.1) The Asian countries have adopted different economic systems ranging from central planning (as in the socialist countries) to laissezfaire capitalism (as in the case of Hong Kong). The differences in

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economic systems, however, have been fading at a very rapid pace as tensions between the West and the East ease and economic reform proceeds in the socialist countries. Convergence in economic systems also occurs among the capitalist economies. Liberalization and deregulation measures increasingly undertaken by the ASEAN countries, South Korea and Taiwan are bringing these economies closer to a free-market system. On the other hand, the government of Hong Kong has played a significant role in some ways in the face of a rapid economic transformation. Division of labour according to comparative advantage Reflecting the openness and diversity of the region, the catching-up of the developing countries with the advanced countries in the AsiaPacific region can be characterized by the flying-geese model. Countries specialize in the export of products in which they enjoy comparative advantage commensurate with their levels of development, and at the same time they seek to upgrade their industrial structures through augmenting their endowment of capital and technology. Foreign direct investment from the more advanced countries to the less developed ones, through relocating industries from the former to the latter, plays a dominant role in sustaining this process. The ‘flying-geese’ pattern of sustained dynamism The flying-geese model was first used to describe the life cycles of industries in the course of economic development (Akamatsu, 1962). The focus was on specific industries in specific countries. The flyinggeese model has been extended to apply to the dynamic changes in the industrial structure (that is, the rise and fall of different industries) in specific countries, and further to the shift of industries from one country to another (Chen, 1989; Yamazawa 1990a). In the original form of the flying-geese model, the life cycle of a particular industry is represented by the trends in the value (or volume) of imports, production and exports. For a particular industry, the level of imports first rises and then declines. The same rise-andfall pattern is later repeated by domestic production and by exports. When plotted against time, imports, domestic production and exports form a pattern of overlapping inverted V-shape curves like wild geese flying in orderly ranks. The analysis can be simplified by referring to an indicator of comparative advantage. For example, the evolution of the ratio between production and consumption (or domestic

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demand) over the life cycle of an industry also takes the form of an inverted V-shape curve (Figure 1.2). In general, each industry passes through five stages—introduction stage, import-substitution stage, export stage, mature stage, and reverse-import stage. In the introduction stage, domestic production starts through imitation or transfer of technology, but the domestic market remains dominated by imports. In the import-substitution stage, domestic production expands at a faster pace than demand so that imports start to fall. The industry moves to the export stage when production expands to surpass domestic demand so that there is a surplus for export. In the mature stage, production and exports start to decline on the back of rising production costs and investment in less developed countries accelerates. Finally, the reverse-import stage is reached when the industry becomes a net importer again, with some part of the imports coming from overseas subsidiaries of the country concerned.

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Capital accumulation (including the inflow of foreign direct investment) and forward and backward linkage with other industries, by changing the comparative advantage of the country concerned, usually leads to an upgrading of industrial structure. This can be represented by repeating the inverted V-shaped curve showing the production/consumption ratio for emerging industries which are usually more capital- and technology-intensive than their predecessors (Figure 1.2, graph a). A typical sequence seen among Asian countries is the shift from the textiles industry to the chemical industry and then further to the steel industry and the automobile industry. When extended to the context of an open economy, the flyinggeese model is used to describe the shifting of industries from more advanced countries to countries catching up from behind. This is shown in Figure 1.2, graph b with the inverted V-shape curves now representing the same industry in different countries (rather than different industries in the same country). A typical example is the shifting of textile production from Japan to the Asian NIEs and then further to the ASEAN countries and China. Following this flying-geese pattern, a sophisticated division of labour among the Asian countries has also taken shape in the electrical and electronic industry.2 In this process, foreign direct investment and trade play an important role. In the investing countries (usually countries at higher levels of economic development), the relocation of declining industries releases resources (labour and capital) for emerging industries, making it possible to upgrade the industrial structure. In the receiving countries (usually countries at lower levels of economic development), the inflow of foreign direct investment helps to introduce funds, management know-how and technology needed for catching up with the industrial countries. In summary, the major conditions for the realization of the flyinggeese pattern are: • • •

geographical proximity; diversity in the level of economic development; and an open economic system favouring international trade and investment.

These conditions have been broadly met among Japan, the Asian NIEs and the ASEAN countries since the 1960s. The socialist countries in the region have also satisfied the first two conditions in relation to their fast-growing neighbours, but it is only recently that more open economic systems have come into place in these countries.

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From flying geese to aerobatics Though the ‘flying-geese’ hypothesis has been an accurate description of the pattern of economic development in the Asia-Pacific region in the past two decades, by now it is perhaps a little out-dated. It also may be inappropriate to use the concept to describe the existing and future pattern of industrialization in the region in view of the increasing importance of new technologies as a determinant of industrial development and specialization.3 This is because the flyinggeese concept denotes a group of economies arranged orderly in tiers in accordance with their stages of industrialization. Industries or industrial production processes or technologies will be passed from a higher tier to a lower tier when comparative advantages change in such a way that it is no longer profitable for the higher tier economies to engage in the production of the product. In the AsiaPacific context, it implies that industries are passed on from the US to Japan, then to the NIEs and then to the ASEAN countries. This hypothesis in essence asserts that there is a product life cycle, and that countries participate in the production of the product at different stages of the cycle in accordance with their comparative advantages. With rapid developments of new technologies and a trend of increasing globalization of production and technology, product life cycles (if existing at all) tend to be very short. It is for this reason that the product life cycle hypothesis of foreign investment has to be reassessed. A trend which we have observed recently and which will certainly continue is a specific pattern of industrial specialization among developing countries generated by the development of a specific new technology. It is no longer always true that an industry is first established in an advanced country and then passed on to the next tier of countries in the next phase of the product cycle. Rather, it is the specialization of different countries in the different sub-sectors of a particular industry that is affected by a newly developed technology soon after the technology is commercialized. Instead of a product life cycle, we should be speaking of a technology cycle in which industries are affected or created by a new technology, and countries specialize in different industries and sub-sectors at different stages of the technological cycle. The new technologies such as information technology, biotechnology and material sciences are cases in point. As soon as a new technology is introduced, different developing countries look for opportunities and find different production niches in accordance with their competitive edges. Given time, some flying-geese type of diffusion of processes/products from a higher tier to a lower tier of countries will certainly also occur. But the primary and more interesting aspect of this pattern of industrial specialization is technology-determined. Each time a new technology

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becomes commercialized, a cluster of economies engaged in a new pattern of division of labour will occur. To describe this vision of industrial development and specialization, the imagery of air display or aerobatics is perhaps more appropriate than that of a team of flying geese. Aeroplanes taking part in an air display form different patterns and each has a specific role to play in a particular pattern. When a signal is sent by the commander, the planes change formation and present a different pattern. The pattern continually changes and there are no clearly defined tiers or groups of planes. This is analogous to the different patterns of industrial specialization generated by different newly developed technologies. For example, with the emergence of biotechnology, various Asia-Pacific economies have responded somewhat differently and focused on diverse areas of specialization when applying the technology to agriculture and industry. This specialization does not exhibit any flying-geese pattern in which specialization would be in accordance with a pecking order of economies. Instead, each developing country takes up a specific role and engages in a particular application of the technology to a certain sector, all at the same time. With the possibility of ‘technology leapfrogging’, the area of specialization in the application of a particular technology is not necessarily related to the level of development of that country. With a new technology emerging, another clustering will take place with different countries responding somewhat differently. In short, the flying-geese pattern of industrial development is governed by the different levels of technology prevailing in different economies while the aerobatics pattern is determined by the type of technology prevailing at a certain period of time. An aerobatics hypothesis of industrial development should at least exist side by side with the flying-geese hypothesis, even if it does not replace it. Whether flying-geese or aerobatics, such patterns of industrialization in the Asia-Pacific region have helped promote the formation of subregional economic zones. The conditions required for the realization of the flyinggeese or aerobatics patterns such as geographical proximity, economic complementarity and outward-looking strategies of development are also the conditions needed for the emergence of subregional economic zones. We can envisage the following virtuous circle of industrialization in Asia-Pacific at the regional level. In the course of economic development, countries undergo changes in comparative costs. To maintain competitiveness at the domestic and international levels, firms have to relocate their production activities overseas through foreign direct investment. As a result, a sophisticated subregional division of industrial labour emerges, giving rise to the spreading of industrialization throughout the region in accordance with either

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the flying-geese or the aerobatics pattern of industrial diffusion. Subregional economic zones emerge for the facilitation of such industrial cooperation and division of labour. Industrialization in the region as a whole is further promoted. Another circle then begins. Expansion of new frontiers The global trend towards detente, by removing the political barriers separating socialist countries and market economies, has helped make cooperation across national borders possible in Asia. The demise of communism in Eastern Europe and the Soviet Union, in particular, has had significant repercussions on the socialist countries in the region. The failure of Soviet-type socialism as a model of economic development contrasts sharply with the success of the Asian NIEs and ASEAN countries which have relied mainly on the market in organizing economic activities. With the age of ideology closing and aid from the former Eastern Bloc countries drying up, the time is ripe for the socialist countries in Asia to reconsider their development strategy. An obvious alternative is to open their doors further to take advantage of the dynamism in the Asia-Pacific region. The reverse domino phenomenon During the 1960s, at the height of the Cold War, the famous domino theory predicted that if Vietnam fell to communism, the rest of Southeast Asia would follow. Ironically, the reverse is now taking place, with the expansion of new frontiers of the Asian economies into the socialist countries gathering momentum (Figure 1.3). The gain from economic cooperation for countries on both sides of the new frontiers—a form of peace dividend in Asia—can be immense.4 Complementarity between the two sides of the new frontiers has increased in recent years, raising the potential gain from regional cooperation. Ironically, growing complementarity has resulted from the widening income gap between countries on the two sides of the new frontier. Countries on the more advanced side of the frontier have found that rapid economic growth pushes up wages and land prices. As a result, relocating their industries in neighbouring countries helps reduce production costs and enhance export competitiveness. For countries on the other side of the frontier, the inflow of foreign direct investment provides them with employment opportunities and the funds, technology and infrastructure needed for economic development. (See the discussion under ‘The gains from exploitation of complementarity’ late in this chapter for an analysis

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Figure 1.3 Expanding new frontiers of the Asian economies

Source: Nomura Research Institute

of the effect of frontier expansion on the economic welfare of countries involved.) The expansion of Asia’s new frontiers can therefore be interpreted as the integration of the socialist countries into the regional economy, prompted by the rapid dismantling of barriers separating the two sides and in line with the flying-geese pattern of industrial development. Propelled by the energy accumulated over decades in the form of immense unexploited business opportunities, the geese are flying even faster and farther than before. China: The dragon in metamorphosis China’s economic growth since it adopted reform and open-door policies in the late 1970s has been impressive. Average economic growth reached 9.9 per cent between 1979 and 1996, one of the

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highest rates among the Asian countries. Exports surged from US$9.8 billion in 1978 to US$151.2 billion in 1996 (Figure 1.4). The following factors seem to have contributed to the success of economic reform in China. First, reform has followed a gradual and step by step approach, as in the case of liberalization of price controls. This contrasts with the shock therapy pursued in Russia and some other former Eastern Bloc countries. Secondly, reforms in the agricultural sector preceded those in the industrial sector. Improved productivity in the agricultural sector with the dissolution of the communes has freed China’s 1.2 billion people from the threat of hunger and this, in turn, helped promote political stability. Thirdly, reform of the domestic economy has been supplemented by an opendoor policy that emphasizes export promotion and the inflow of foreign direct investment. Since the beginning of 1992, China has stepped up its economic reform and open-door policy. At the 14th National Congress of the

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Chinese Communist Party held in October 1992, the idea of ‘a socialist market economy’ was authorized and a leadership reshuffle was made for the smooth execution of new plans and policies. The socialist market economy envisioned by China is essentially the same as the market economies of the developed countries. Administrative intervention in China will henceforth be aimed mostly at preventing market failures. At the same time, China has been extending its open-door policy from the coastal areas to other regions. In the areas along national borders and the Yangtze River, major cities were granted the right to extend preferential treatment to foreign capital in 1992. The government intends to turn these cities into economic hubs and step up the economic development in peripheral areas. The accelerating liberalization of the Chinese economy has been followed by a rapid increase in foreign direct investment. In 1996 the inflow of foreign direct investment reached US$42.4 billion (on an implementation basis). Recent foreign direct investment in China has been characterized by an increase in large-scale investment projects and expansion to new business areas, such as banking, insurance, commerce, real estate and big resort development projects. At the same time, wholly owned foreign investment has risen and investment to inland regions has expanded. The introduction of foreign capital not only enhances China’s export capacity but also helps improve corporate management efficiency. By opening up its domestic market to foreign companies, China aims to promote productivity through competition not only among Chinese enterprises but also with foreign companies. China’s economic reform and open-door policy have passed the point of ‘no return’. The amendment of the Chinese Constitution in March 1993 symbolizes China’s abandonment of economic planning and the adoption of the market mechanism as the major organizing force of the economy. ‘Planned economy’, ‘state(-run) enterprises’ (guoying-qiye) and ‘people’s communes’, three principal components of an orthodox socialist system, have been removed from the constitution and replaced by ‘socialist market economy’, ‘state-owned enterprises’ (guoyou-qiye) and ‘production responsibility system’, respectively. The power struggle between ‘reformists’ and ‘conservatives’ and the debate between ‘market’ and ‘planning’ has now come to an end. From now on economic reform in China will be pursued under the common ideology of a socialist market economy. Whether China will be able to continue its robust economic growth toward the year 2000 will depend on how it can cope with structural problems such as poor performance of state-run enterprises and huge government fiscal deficits. China intends to solve these problems by shifting to the market economy. This process will

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prompt the reform of state enterprises through the separation of ownership and management as well as privatization, and through slashing price subsidies. Vietnam: from war zone to trade zone In Vietnam, the transition to a market economy started in late 1986 with the introduction of the Doi Moi policy. Much has been achieved in reducing inflation, in cutting fiscal deficits and in boosting agricultural production. Indeed, Vietnam has become the world’s third-largest exporter of rice. The country has also strengthened links with its neighbours through trade and investment. Constrained by the drying-up of foreign aid from the former Eastern Bloc countries, however, its economic performance has lagged far behind its neighbours’. Vietnam’s relations with the United States have improved sharply. The lifting of the US trade embargo on Vietnam in early 1994 is paving the way for the resumption of official development aid and direct investment from the Western industrial countries (the United States and Japan in particular) which in turn will help to speed up Vietnam’s transition from a war zone to a trade zone. At the same time, private capital from non-resident Vietnamese who fled the country after the Vietnam War and from Chinese investors will play an important role in the reconstruction of the Vietnamese economy. North Korea: the last domino North Korea has so far maintained an orthodox Soviet-type planned economy which has resulted in stagnation and a widening income gap with South Korea. The sharp fall in official aid from the former Communist Bloc has brought the North Korean economy to the verge of collapse. Before the Korean War, the north had a higher level of economic development than the South, but today South Korea’s per capita GNP is about ten times that of North Korea. With a population twice that of the North, South Korea’s GNP is estimated at about twenty times that of the North. This gap in economic power is twice as large as that between the two Germanies before unification in 1990. North Korea is facing the need to revitalize its economy by the introduction of foreign capital, as China did in the second half of the 1970s. In an attempt to open its economy, it took up UN membership together with South Korea in 1991 and started to negotiate diplomatic relations with the United States and Japan. Further progress, however, has been blocked since 1993 as concern over North Korea’s nuclear development plan surfaced. Relations with

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15

the West have remained stagnant despite the signing of a framework agreement in October 1994 to resolve the issue. North Korea’s isolated system is now on the verge of collapse. Following the death of paramount leader Kim Il Sung, the new leadership under his son Kim Jong Il has so far failed to implement major breakthroughs in economic reform. Whether the transition of this system to a more open and sustainable one can be achieved smoothly and without delay will have strong implications for economic cooperation in Northeast Asia. Emerging subregional economic zones The expansion of Asia’s new frontiers has been led by subregional economic zones encompassing countries with different economic and political systems and at various stages of economic development. In addition to the ‘South China Economic Zone’ centering around Hong Kong, areas of regional cooperation at more embryonic stages have emerged. They include the ‘Northeast Asia Economic Zone’ (comprising Japan, the Korean Peninsula, northern China and Far East Russia), ‘Greater ASEAN’ (or ASEAN10, comprising the five founding members of ASEAN, Brunei and the socialist countries in Indochina), and the ‘Growth Triangle’ encompassing Singapore and neighbouring provinces in Indonesia and Malaysia. These interlocking economic zones form a corridor linking fast-growing economies from the north to the south along the Western Pacific Rim.5 Decentralization and subregional economic zones In addition to the conditions required for the expansion of new frontiers mentioned above, the decentralization of decision-making power from central governments to local authorities in the countries involved has provided further impetus for economic cooperation across national borders. Countries on both sides of the new frontiers have their own reasons for decentralization. In receiving countries of foreign direct investment such as China and Russia, it is difficult to seek economic development for all regions at the same time. Development strategies in these countries favour unbalanced growth, with priorities being placed on regions where the conditions for industrialization (including economic links with fast-growing neighbouring countries) are more readily met. On the other hand, in investing countries such as Japan and South Korea, the formation of subregional economic zones is used as a leverage to promote the development of peripheral regions.

16

ASIA’S BORDERLESS ECONOMY

By allowing localities to retain the fruit of economic development for re-investment, decentralization has provided more incentives for regional development on both sides of the new frontier. A typical form of decentralization is the setting up of special economic zones where foreign companies enjoy preferential treatment such as tax concessions and easy access to foreign exchange. In most cases, central governments also provide support by granting funds for investment in infrastructure in the special economic zones. The South China Economic Zone The expansion of Asia’s new frontiers is most apparent in southern China, which is emerging as a major production base for labourintensive manufactured goods thanks to large-scale inflows of direct investment from Hong Kong. At first these investments were concentrated in the four Special Economic Zones (Shenzhen, Zhuhai, Shantou and Xiamen) set up in 1980, but gradually they spread inland to take advantage of even lower labour costs and looser regulations. Labour costs in southern China inside the special economic zones are one-fifth those in Hong Kong while those outside the zones are a mere one-tenth of Hong Kong costs. By drastically reducing costs, the shifting of production to China has sharply boosted the profits and export competitiveness of Hong Kong’s manufacturers. In most cases, cooperation between the two sides takes the form of outward processing. Hong Kong firms supply all necessary machinery, parts and raw materials to manufacturers in China and take care of the marketing of finished products. Partners in China provide land and labour and receive payment in the form of processing fees. The number of employees working for Hong Kong subcontractors, joint ventures or subsidiaries in Guangdong Province is estimated at more than 3 million. Hong Kong capital is also helping to build infrastructure in southern China, including a highway network linking Hong Kong, Guangzhou and Macau. Reflecting these developments, the share of re-exports in Hong Kong’s total exports rose from around 20 per cent in the mid-1970s to over 80 per cent in 1996. About 90 per cent of Hong Kong’s reexports involve China either as a source or a destination. Indeed, China has replaced the United States as Hong Kong’s largest export market and, as a result, Hong Kong’s economic growth now follows Chinese economic trends more closely than those of the United States (Figure 1.5).6 Economic integration between Hong Kong and southern China is also apparent in the monetary sphere: the Hong Kong dollar is now widely circulated in Guangdong Province. The political border between Hong Kong and China has remained under the ‘one country, two

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17

systems’ scheme after 1997 when sovereignty over Hong Kong was reverted to China, but the economic border has already disappeared.7 Hong Kong’s new relations with China, however, have also brought undesirable side effects to the domestic economy, such as deindustrialization and a sharp appreciation of the real exchange rate— symptoms similar to those of the Dutch disease (see ‘Expansion of new frontiers and the Dutch disease’ later in this chapter). The number of workers in Hong Kong’s manufacturing sector contracted by more than 50 per cent from a peak level of about 900 000 in the mid-1980s to fewer than 400 000 now. The share of manufacturing in GNP dropped from 24.3 per cent in 1984 to 9.3 per cent in 1994. Inflation, as measured by the year-on-year increase in the CPI, has stayed at around 10 per cent since 1989. Because the exchange rate of the Hong Kong dollar is pegged to the US dollar, the competitiveness of Hong Kong’s domestic exports has declined, helping accelerate the process of de-industrialization.

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Like Hong Kong companies before them, more and more Taiwanese companies are using China as an offshore production base for the manufacture of labour-intensive products. Reflecting rising indirect exports to China, Taiwan’s exports to Hong Kong exceeded its exports to the United States in 1995. Through investment and trade, the economic integration of Hong Kong, Taiwan and southern China is accelerating. Hong Kong, Taiwan, and China’s Guangdong and Fujian Provinces have a combined population of 115 million and a combined GNP comparable to the size of ASEAN. Hong Kong is taking advantage of its freeport position and is emerging as the region’s trading and financial center. Indeed, it has become the world’s largest container port and the tenth leading exporter. With southern China as its hinterland, Hong Kong is fast transforming itself from a city-state to the capital city of a national economy. Boosted by Hong Kong and Taiwanese capital, southern China has entered a stage of economic take-off, and Guangdong Province now boasts the highest economic growth rate in the world. The Northeast Asia Economic Zone An economic zone involving countries bordering the Japan Sea—Japan, South and North Korea, Northeast China, and Far East Russia—is emerging in Northeast Asia. It has great potential because of the endowment of natural resources and economic complementarity among its members. As in other economic zones in Asia, countries in the Northeast Asia Economic Zone are seeking to promote cooperation and economic development through international trade and investment. The development of the Russian Far East would require funds and technology from Japan and Korea, and labour from Northern China and North Korea. To cope with rising production costs at home, South Korea has shown interest in extending its economic frontier to neighbouring Chinese provinces and North Korea. Since 1989 there has been a marked improvement in the relations among countries surrounding the Japan Sea, including the normalization of Sino–Soviet relations and the establishment of diplomatic links between the Soviet Union and South Korea. A number of problems, including the territorial dispute between Russia and Japan over four northern islands and the antagonism between North and South Korea, nevertheless remain to be solved before economic cooperation can yield real benefits. Among the various moves towards economic cooperation by the countries surrounding the Japan Sea, the following four seem to be the most promising:

THE EMERGENCE OF SUBREGIONAL ECONOMIC ZONES IN ASIA • • • •

19

Japanese investment in Far East Russia; economic exchanges between South Korea and China; the Tumen River Development Project; and South Korean investment in North Korea.

First, the natural resources of Far East Russia are extremely attractive to Japan. In the past, economic exchanges between Japan and Far East Russia were seriously hindered by political and diplomatic hurdles. However, economic cooperation has expanded since the introduction of perestroika under the former Soviet Union and in particular, the dissolution of the Soviet Union in 1991. So far, Japanese investment in Far East Russia has been concentrated in the processing of marine products and in activities relating to agriculture and forestry. The potential of petroleum and natural gas development in Sakhalin remains untapped. Japanese companies will remain reluctant to expand their commitments in Far East Russia until political and economic stability is restored and a legal framework protecting foreign investors is in place. More support from the Japanese government would be forthcoming if the dispute over the sovereignty of the northern islands were to be settled. Secondly, economic exchanges across the Yellow Sea between South Korea and China have spawned the concept of the ‘Yellow Sea Economic Zone’. Following Hong Kong’s and Taiwan’s examples, South Korea is expanding its economic exchanges with China. The establishment of diplomatic relations in August 1992 cleared the last hurdle restricting trade and investment between the two countries. Thirdly, a major development project in the Tumen Delta area bordering North Korea, China and Russia is in progress under the auspices of the UN Development Program. South Korea and Japan have shown interest in participating in the project. However, the total investment needed is estimated to be as much as US$30 billion, and the funding sources for the project have yet to be found. In addition, the Russian and Chinese governments are more committed to the development of Vladivostok and Hunchun within their own borders than to the Tumen River Project. Fourthly, progress has also been made in bilateral economic cooperation between South and North Korea. North Korea is preparing industrial estates exclusively targeting investors from the South in various parts of the country. Should mutual trust be established between the sides, development projects similar to China’s special economic zones may be launched along the 38th parallel demilitarized zone which now separates the North from the South. Economic integration may serve as a catalyst for political integration between the North and the South. The experience of German unification suggests that the costs of an outright ‘acquisition’ of the North would be too high for the South to bear. A

20

ASIA’S BORDERLESS ECONOMY

more desirable scenario would be for relations between the North and South to follow the China–Taiwan model, with freer trade and investment flows but limited labour mobility. The Indochina Economic Zone Thailand has been actively strengthening economic links with its neighbours in Indochina. Vietnam, Laos and Cambodia are well endowed with petroleum, coal and other mineral resources needed for the industrialization of Thailand. In the long term, Thailand is also eyeing the region as an export market. Indochina suffered economic stagnation during the Vietnam War and the civil war in Cambodia. By promoting economic development in Indochina, Thailand hopes to maintain political stability in the region. On the other hand, to take advantage of the dynamism in the Asia-Pacific region, Vietnam, Laos, Cambodia and Myanmar have shifted to more outward-looking development strategies. To strengthen economic links with its neighbours, Vietnam joined ASEAN in 1995 and Laos, Cambodia and Myanmar are expected to follow soon. A number of problems remain to be solved before Indochina can grow into an economic zone comparable with that of South China. First, the fear of being dominated by Thailand has prompted Vietnam to strengthen its ties with other countries; in addition to the ASEAN countries, it is seeking investment from Japan, Taiwan, and Hong Kong. Indeed, Hong Kong is now challenging Bangkok as the economic gateway to Vietnam. Secondly, the socialist countries in Indochina have become more cautious in conserving their natural resources, which so far have been their major sources of foreign earning. Thirdly, economic cooperation has centered on bilateral relations between Thailand and the socialist countries and other intraregional linkages are yet to be established. Further progress, including the development of the Mekong Delta, will require coordinated efforts among all participating countries. To achieve this end, the Asian Development Bank has taken initiatives to promote economic cooperation in the Greater Mekong Subregion by identifying viable joint projects in transportation, energy, human resource development, environment and resource development, trade, investment, tourism, and telecommunications. The growth triangles The growth triangle concept, as advocated by Singapore’s Prime Minister Goh Chok Tong, calls for a joint effort to develop the

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21

Malaysian state of Johor and Indonesia’s Riau Province (embracing Batam Island) into manufacturing bases. Singapore is playing a leading role by providing the infrastructure and management know-how, as well as other supporting services. Investors can optimize factor utilization by setting up their regional headquarters in Singapore and locating different manufacturing processes in the three areas according to their land and labour requirements. The growth triangle should mark the first step in further economic cooperation among Singapore, Indonesia and Malaysia. It has the potential to develop into a large economic zone that also includes the rest of Malaysia and Indonesia. Singapore is expected to play the role of business service center for this ‘Maritime Southeast Asia Economic Zone’, the same role Hong Kong is now playing for the South China Economic Zone. The growth triangle may be a model for other intra-ASEAN economic cooperation (such as the Northern Triangle encompassing neighbouring provinces in Malaysia, Indonesia and Thailand) to follow. Unlike other subregional economic zones in Asia, the growth triangles among members of ASEAN do not include any socialist countries and involve more government participation. The energy comes from strengthening cooperation among the ASEAN countries rather than the reverse domino effect of economic reform and open door policy in the socialist countries.8 The much slower pace of progress in the former compared with that of the latter explains why cross-border economic exchanges in the growth triangle have lagged far behind those in the South China Economic Zone. The economic impact on participating countries In this section we examine in more detail the costs and benefits to the countries involved in the expansion of new frontiers. The analysis is fairly technical and can be skimmed by readers without losing the flow of our arguments. The gains from exploitation of complementarity The effect of frontier expansion on the economic welfare of the countries involved can be illustrated by the textbook version of the theory of foreign direct investment (MacDougall, 1958). As a first approximation, the expansion of new frontiers can be treated conceptually as the relocation of capital stock from a capital-abundant country where the rate of return (which reflects the marginal productivity of capital) is low to one where the marginal productivity

22

ASIA’S BORDERLESS ECONOMY

of capital is high. The investing country usually has a higher level of economic development than that of the receiving country. Consider Country A (for example, Hong Kong) and Country B (for example, China) producing an identical output, using labour and capital. The labour force is assumed to be fixed in each country and fully employed. Assuming that perfect competition prevails in both countries, the returns on capital and labour are equal to their marginal products, both measured in terms of the output. In Figure 1.6, the vertical axis measures the marginal product of capital. The horizontal axis measures the capital stock in each country, measured from O for Country A and from O' for Country B, so that OO' measures the total capital stock of the two countries. AB and A'B' show the marginal product of capital for Country A and Country B, respectively. Both schedules decline as the capital stock increases, reflecting diminishing marginal productivity, given fixed labour input. In the absence of international factor mobility, Country A holds OC of capital and Country B holds CO'. The marginal products of capital (which equals the return of capital) for Countries A and B are given by r0 and r0', respectively, with capital earning higher return in Country B than Country A. The income or output for Country A (Country B) is given by OAFC (O'CGA'), with OIFC (O'CGH) accruing to capital owners and IAF (HA'G) accruing to labour. In the

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23

absence of factor mobility across national borders, the concept of output (or GDP) coincides with income (or GNP). Now let us assume that restrictions on capital flows between the two countries are removed (but labour mobility remains restricted). Investors in Country A will move capital to B where the return is higher until the returns in both countries become equal. This would require moving DC of capital from Country A to Country B. At equilibrium, Country A holds OD of capital while Country B holds O'D, both earning a return equal to r1. 9 Output declines in Country A but rises in Country B, but income rises in both countries. Country A’s GDP falls by DEFC, reflecting the decline in capital stock. However, this does not mean a decline in Country A’s GNP as return to investment in Country B as measured by DEMC more than offset the decline in domestic output. The net gain to Country A is given by EMF. On the other hand, Country B’s GDP rises by DEGC, reflecting the rise in capital stock, but GNP increases only by EGM, as DEMC in Country A and the reverse is true for Country B. The increase in combined GDP (or GNP) of Country A and Country B, which results from the improvement in the allocative efficiency of the capital stock, equals EGF. The relocation of capital stock across national borders also alters the distribution of income between labour and capital in both countries. Although the income to be shared by labour and capital increases in both investing and receiving countries, labour income falls in absolute terms in the former and capital income drops in the latter. In Country A, where the capital/labour ratio declines, labour income falls by IJEF; capital income rises by IJMF, IJEF, at the expense of labour income, and EMF gain from improved efficiency. In Country B, where the capital/labour ratio rises, labour income rises by EGHJ', MGHJ', at the expense of capital income, and EGM gain from improved efficiency. The above analysis has focused on the effect of capital flows accompanying the ‘opening’ of the receiving country to foreign investment, but the same framework can be applied to study the effect of the ‘catching-up’ of the receiving country, interpreted here as an increase in the marginal productivity of capital in country B. This can be represented by an upward shift of the A'B' schedule to A'B'. The resulting gap in the rate of return prompts a shift of capital stock from Country A to Country B. At the new equilibrium E', the divergence between GDP and GNP increases further. As in the case of ‘opening’, capital flow accompanying the ‘catching-up’ of the receiving country enjoys increases in labour income and capital income, as well as in GNP and GDP.

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Expansion of new frontiers and the Dutch disease The model just described can be extended to examine the Hong Kong version of the Dutch disease by introducing a non-tradable sector to the investing country.10 Consider three sectors: a non-tradable sector in Country A, a tradable sector in Country A and a tradable sector in Country B. The last two sectors are assumed to produce an identical good with an identical production function. Labour is assumed to be mobile between the non-tradable and tradable sectors in Country A (but not across national borders). Capital is assumed to be mobile only between the two sectors in Country A initially, but among all three sectors when restrictions on capital flows are relaxed. The impact on Country A of a relaxation of restrictions on capital flows can be analyzed with reference to Figure 1.7. The initial equilibrium can be illustrated by the production possibility curve NT, which shows the combination of tradable and non-tradable goods attainable given the endowment of labour and capital (both assumed to be mobile between the two sectors). Assuming that income equals consumption, NT can also be interpreted as the consumption possibility curve. Initial equilibrium is at point E where the production possibility curve is tangential to the highest attainable social indifference curve. The initial price of the non-tradable sector (relative to that of the

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tradable) is given by the slope of the common tangent to the two curves at E. The relaxation of restrictions on capital flows leads to a relocation of the mobile factors among the three different sectors and divergence between the production possibility curve and the consumption possibility curve. Reflecting the shift of capital from Country A to Country B, the production possibility curve shrinks to NT1'. On the other hand, the consumption possibility curve shifts outward to NT1. Both the expansion of the consumption possibility curve and contraction of the production possibility are biased toward the tradable good sector. The new equilibrium is reached at E1, where the new consumption possibility curve is tangential to the highest social indifference curve. So long as the non-tradable good is a normal good (that is, the demand for it rises with increase in income), E1 lies above E. Since the expansion of the consumption possibility curve is biased toward the tradable sector, the price of the non-tradable good relative to that of the tradable good (given by the common tangent at E1) must be higher than at E. Domestic production is at E1', with higher production of the non-tradable good and lower production of the tradable good (de-industrialization). The difference between GNP and GDP, measured in terms of the tradable good, is given by the distance between E1' and E1. Given export prices and import prices in terms of foreign currencies in international markets (the small country assumption), the change in the relative price between the non-tradable good and the tradable good (or appreciation in the real exchange rate) can take the form of an inflation in the non-tradable sector, an appreciation of the exchange rate, or a combination of the two. In countries with fixed exchange rates, such as Hong Kong, expansion of new frontiers has led to chronic inflation. In the case of Taiwan, to curb inflation, the government has allowed the local currency to appreciate.

Notes 1 However, in terms of GNP adjusted for purchasing power parity (PPP), the per capita income differentials among Asia-Pacific economies become smaller (World Bank, 1995). The per capita income of Hong Kong so adjusted (US$21 560) surpassed that of Japan (US$20 850) in 1993, while China’s per capita income was adjusted upward from US$435 to US$2330. In general, the World Bank’s calculation has been characterized by a significant upward adjustment for Asia’s

26

2 3 4

5

6

7 8

9

10

ASIA’S BORDERLESS ECONOMY

developing economies, a moderate upward adjustment for the newly industrializing economies and a downward adjustment for Japan. See, for example, JETRO (1992). This is adopted from Chen (1992) and Chen (1993). A more direct form of peace dividend in Asia is the conversion of military facilities to civil use. A typical example is the plan to transform the US Subic Naval Base in the Philippines to a commercial and industrial area after the retreat of the US forces in late 1992. Subic contains modern infrastructure that the rest of the Philippines lacks— a well-developed insulated deep harbour, ship repair facilities, airport, housing, telecommunications and recreation facilities. Although the US government has transferred most of its equipment out of Subic, the strategic location of the base makes it a prime site. A number of works in Japanese have been published on this phenomenon of subregional zones. Some conference volumes have also been published in English on this subject (Toh & Low, 1993 and Thant, Tang & Kakazu, 1994). The papers in such volumes, however, to a large extent are not well integrated and lack a common thread. This book aims to fill the gap in the existing literature. It should, however, be noted that Hong Kong–China trade statistics are significantly affected by the outward processing activities of Hong Kong firms in China. Double and triple counting of the same product going back and forth across the border exaggerates the importance of China as a trading partner of Hong Kong. See Sung (1995). For the complementary relations between Hong Kong and China, see Sung (1991). ASEAN’s restrictive requirement that all activities must benefit all member countries has hindered economic cooperation among the ASEAN countries. The growth triangles represent attempts to circumvent this requirement through cooperation among a smaller number of members outside the ASEAN framework (the six minus X formula). See Ng and Wong (1991). For simplicity, the following analysis focuses on the final equilibrium where marginal products of capital of the two countries have been equalized, but the conclusions concerning income and output remain basically the same when we focus on any point between the initial equilibrium and the final equilibrium instead. For a theoretical analysis of the Dutch disease, see Corden and Neary (1982).

References Akamatsu, K. (1962) ‘A Historical Pattern of Economic Growth in Developing Countries’, The Developing Economies, Preliminary Issue, March– August, 1962, pp. 3–25. Chen, Edward K.Y. (1989) ‘The Changing Role of the Asian NICs in the Asian–Pacific Region towards the Year 2000’, in Miyohei Shinohara

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and Fu-chen Lo (eds) Global Adjustment and the Future of Asian-Pacific Economy, Institute of Developing Economies: Tokyo. ——(1992) ‘Technology Development and Industrial Specialization in the Asian Pacific Region’, in S.P. Gupta and Somsak Tambunlertchai (eds) The Asia Pacific Economies: A Challenge to South Asia, Macmillan: New Delhi. ——(1993) ‘Economic Restructuring and Industrial Development in the Asia–Pacific—Competition or Complementarity?’, Business and the Contemporary World, vol. 5, no. 2, Spring, 1993, pp. 67–88. Corden, W. M. and Neary, J. P. (1982) ‘Booming Sector and De-industrialization in a Small Open Economy’, Economic Journal, vol. 92, December, pp. 825–48. JETRO (1992) White Paper on International Trade, Japan External Trade Organization: Tokyo. MacDougall, G. A. D. (1958) ‘The Benefits and Costs of Private Investment from Abroad: A Theoretical Approach’, Economic Record, vol. 36, pp. 13–35. Ng, C. Y. and Wong, P. K. (1991) ‘The Growth Triangle—A Market-Driven Response?’ in Asia Club Papers, no. 2, Tokyo Club Foundation for Global Studies: Tokyo, pp. 123–51. Sung, Y. W. (1991) The China–Hong Kong Connection, Cambridge University Press: Cambridge. ——(1995) ‘Subregional Economic Integration: Hong Kong, Taiwan, South China and Beyond’, in Edward K. Y. Chen and Peter Drysdale (eds) Corporate Links and Foreign Direct Investment in Asia and the Pacific, Harper Educational: Pymble, Australia. Thant Myo, Min Tang and H. Kakazu (eds) (1994) Growth Triangles in Asia, Oxford University Press: Hong Kong. Toh Mun Heng and Linda Low (eds), (1993) Regional Cooperation and Growth Triangles in ASEAN, Times Academic Press: Singapore. World Bank, (1995) World Development Report, Oxford University Press, Oxford. Yamazawa, I. (1990a) Economic Development and International Trade: The Japanese Model, East-West Center, Resource Systems Institute: Honolulu, Hawaii.

2

The South China Economic Zone Joseph Siu-Lun Lee

After decades of development, spillover effects of Hong Kong and Taiwan have spread to Guangdong and Fujian in mainland China so that a borderless economy encompassing a much larger region with different comparative advantages has emerged. This concept of ‘Greater China’ was first coined by Chen (1987). Since then, prolific literature has been written on the subject. However, most of the literature just mentions the fact that these places are complementary to each other without going into the detail of how these complementarities arise. It is the aim of this chapter to fill the gap in the literature and to quantitatively describe the complementarities. Chen (1987) calls the enlarged Hong Kong growth zone ‘Greater Hong Kong’. The term was an accurate description of the situation at that time when economic cooperation between Hong Kong and the Pearl River Delta became intensive. However, the zone developed very rapidly and enlarged to include Taiwan and other provinces of China. The term, South China Economic Zone (SCEZ), has therefore become more common. The SCEZ, in a broad sense, includes Hong Kong, Macau, Taiwan and southern provinces of China such as Guangdong, Hainan, Fujian, Zhejiang and even Shanghai. The SCEZ, narrowly defined, includes only Hong Kong and the Pearl River Delta. For the purposes of this chapter, the SCEZ includes Hong Kong, Taiwan, Guangdong and Fujian because economic interactions are most intensive among these places. The emergence of the SCEZ is fundamentally due to the complementarities that exist among the economies involved. These complementarities are the result of differences in factor endowments which reflect different stages of economic development. 28

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Table 2.1 Estimates of GDP, South China Economic Zone, 1961–94 GDP/GNP growth in real terms (%) Region Hong Kong Taiwan Period 1966–94 1960–93 Growth rate 7.8 8.9

Guangdong 1978–93 13.9

Fujian 1978–93 12.5

Per capita GDP/GNP growth in real terms (%) Region Hong Kong Taiwan Period 1966–94 1960–93 Growth rate 5.7 6.8

Guangdong 1978–93 11.8

Fujian 1978–93 10.7

GDP/GNP in 1993 at current prices Region Hong Kong* Taiwan Guangdong US$mn 131 666 220 145 37 473 Domestic currency HK$1 019 228 NK$5 809 288 RMB 322 530 (mn)

Fujian 11 946 RMB 102 814

Per capita GDP/GNP in 1993 at current prices Region Hong Kong Taiwan US$mn 21 722 8710 Domestic currency HK$1 168 151 NT$ 229 843

Guangdong 569 RMB 4901

Fujian 391 RMB 3364

Composition of GDP/GNP (%) Year Hong Kong

Guangdong

Fujian

Primary Secondary Tertiary

1980 1993 1980 1993 1980 1993

Taiwan

4.6 3.5 31.6 18.5 63.8 78.0

Export growth in value terms (%) Region Hong Kong Period 1966–94 Growth rate 18.8

7.7 3.5 45.7 40.6 46.6 55.9 Taiwan 1960–93 20.9

33.8 17.3 41.1 50.4 25.1 32.3 Guangdong 1978–93 21.9

37.2 25.3 41.5 45.1 21.3 29.6 Fujian 1978–93 25.6

Relative importance of domestic exports and re-exports in Hong Kong (%) Year Domestic exports Share (%) Re-exports Share (%) (HK$mn) (HK$mn) 1970 1975 1980 1985 1990 1994

12 22 68 129 225 222

347 859 171 882 875 092

81.0 76.6 69.4 55.2 35.3 19.0

2 6 30 105 413 947

891 974 071 270 999 921

19.0 23.4 30.6 44.8 64.7 81.0

Note: *refers to 1994 figures. Sources: Census and Statistics Department, Estimates of GDP, 1961 to 1994; Council for Economic Planning and Development, Taiwan Statistical Data Book 1994; Guangdong Statistical Bureau, Guangdong Statistical Yearbook 1994; Fujian Statistical Bureau, Fujian Statistical Yearbook 1994.

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Stages of Economic Development Hong Kong Table 2.1 shows that the real GDP of Hong Kong rose at an average annual rate of 7.8 per cent between 1966 and 1994, while real per capita GDP rose at a rate of 5.7 per cent—rates that are considered high by world standards. GDP at current prices amounted to HK$1019.2 billion (US$131.7 billion) in 1994 and per capita GDP was HK$168 151 (US$21 722); the latter was among the highest in the developing world and was even higher than the per capita GDP in some of the OECD countries. The contribution of the primary sector to GDP has been small in Hong Kong. The contribution of the secondary sector to GDP is also decreasing, primarily due to the shrinking of the manufacturing sector.1 The secondary sector contributed 31.6 per cent to GDP in 1980. Its importance fell to 18.5 per cent in 1993. With regard to the tertiary sector, its contribution to GDP is expanding rapidly, rising from 63.8 per cent in 1980 to 78.0 per cent in 1993, suggesting that Hong Kong is moving towards a services economy.2 Within the tertiary sector, the most important contributors are the wholesale, retail, import/export, restaurants and hotels sector and the financing, insurance, real estate and business services sector; the share of the former rose from 21.4 per cent in 1980 to 26.5 per cent in 1993 and that of the latter from 23.0 per cent to 25.7 per cent. Growth was largely export led.3 The total exports of Hong Kong grew at an average per annum rate of 18.8 per cent between 1966 and 1994. Hong Kong was the eighth largest exporting economy by 1994. Total exports are broadly divided into domestic exports and re-exports. Table 2.1 also shows the relative importance of the two. In 1970, the share of domestic exports in total exports was 81.0 per cent. Since the inauguration of the Open Door Policy by China in 1978, Chinese exports through Hong Kong rose tremendously, and the growth of re-exports outperformed that of domestic exports. In 1988, re-exports superseded domestic exports. In 1994, re-exports accounted for 81.0 per cent of total exports. The importance of the two has been reversed. After growing robustly for four decades, Hong Kong is now an advanced economy, moving in three directions: first, from a manufacturing economy to a services economy; secondly, within the manufacturing sector industries are moving from labour-intensive production to capital and skills-intensive production; and thirdly, traditional industries are being upgraded.

THE SOUTH CHINA ECONOMIC ZONE

31

Taiwan When the Communist Party gained complete control over mainland China, the Kuomintang Party settled in Taiwan and embarked upon an ambitious program of industrialization. The real GNP of Taiwan rose at an average per annum rate of 8.9 per cent between 1960 and 1993, whereas real per capita GNP rose at an annual rate of 6.8 per cent. In nominal terms, GNP amounted to NT$5809.3 billion (US$220.1 billion) in 1993, while per capita GNP was NT$229 843 (US$8710) — the latter was the fourth highest in the West Pacific region, following Japan, Hong Kong and Singapore. The contribution of the secondary sector to GNP in 1980 was 45.7 per cent. Although the share fell to 40.6 per cent in 1993, the sector remained crucial to the economy. For the services sector, its share rose from 46.6 per cent to 55.9 per cent over the same period. Taiwan adopted the development strategy of easy import substitution (IS1)4 in the 1950s and the strategy was successful. However, being limited by the size of its domestic market, there was a policy switch to ‘easy’ export orientation (EO1) in the early 1960s. Exports have risen rapidly since then, with a growth rate amounting to 20.9 per cent between 1960 and 1993. Sustained growth in Taiwan has made it one of the richest countries in Asia in terms of per capita GNP. In terms of growth rate of GNP, Taiwan performed better than Japan and the other Asian NIEs during the 1960s and 1970s. Taiwan is generally regarded as an industrialized economy. Industrial products have an overwhelmingly large share in exports. Industrial development reached a mature stage in the early 1980s. Expansion in new industries now has to be matched by the contraction or relocation of outdated industries. The general trend is for heavy industries with high capital and technology content to replace light industries with a high labour content. Southern China Economic growth in China has been amazing since the introduction of the Open Door Policy in 1978. The real GDP of Guangdong rose at an average per annum rate of 13.9 per cent between 1978 and 1993, while real per capita GDP increased at an average annual rate of 11.8 per cent during the period. GDP at current prices in 1993 amounted to RMB322.5 billion (US$37.5 billion) and per capita GDP was RMB4901 (US$569) in the same year. The growth of Guangdong’s economy is so amazing that the province is now described as the Fifth Asian Dragon.5

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ASIA’S BORDERLESS ECONOMY

Similar remarkable growth was experienced in Fujian. Between 1978 and 1993, real GDP grew at an annual rate of 12.5 per cent, while real per capita GDP grew at a rate of 10.7 per cent. GDP in nominal terms reached RMB102.8 billion (US$11.9 billion) in 1993, with per capita GDP at RMB3364 (US$391). Despite much higher growth rates, gaps between the per capita GDP of Guangdong and Fujian and those of Hong Kong and Taiwan remained. In terms of sectoral composition, the secondary sector contributed 50.4 per cent to Guangdong’s GDP in 1993, compared with 41.1 per cent in 1980. For the tertiary sector, the share was 32.3 per cent in 1993, up from 25.1 per cent in 1980. Turning to Fujian, while the secondary sector increased from 41.5 per cent in 1980 to 45.1 per cent in 1993, the tertiary sector increased from 21.3 per cent to 29.6 per cent. It is obvious that the tertiary sector of both provinces is suppressed and that their economies would be best served by Hong Kong taking over their requirements. At the same time, the primary sector remained relatively large compared with those of Hong Kong and Taiwan so there was still room for the manufacturing and services sectors to expand. Since the implementation of the Open Door Policy in 1978, exports from China have risen tremendously. As preferential policy concentrated on the southern part of China, the export growth of the southern provinces was amazing. Exports from Guangdong6 increased at an average annual rate of 21.9 per cent between 1978 and 1993. For Fujian, export growth was 25.6 per cent per annum on average over the same period. Although China is a developing country, the southern part of it is at the stage of economic take-off. GDP and per capita GDP growth have been higher in southern China than the country averages. Similar findings have been observed in export growth. Following the examples of the Asian NIEs, southern China started its industrialization by exporting labour-intensive products. Although there are signs that southern China, particularly Guangdong, is now trying to upgrade its industries and technological level, manufacturing of light industrial products using standardized technology and abundant labour is still the main driving force of economic growth. As Hong Kong, southern China and Taiwan belong to different stages of economic development, they are complementary to each other. Both Hong Kong and Taiwan are advanced economies, while southern China is at the stage of economic take-off. Hong Kong is moving from an industrial economy to a services economy. Taiwan is moving from an economy based on light industries to one based on heavy industries. For both of them, traditional industries have to be relocated in low-wage countries to maintain their competitiveness.

33

THE SOUTH CHINA ECONOMIC ZONE

Both are looking for investment opportunities desperately. Southern China, on the other hand, is embarking upon its industrialization program and is in need of capital. As the three places are complementary to each other, potential economic benefits for all three parties will therefore be great should they develop closer economic linkages.

Table 2.2 Factor endowments in Hong Kong and Taiwan HONG KONG Labour engaged by economic sector (%) Year 1976 1980 1985 1990 1993

Manufacturing

Services

49.7 46.0 39.2 29.5 20.5

39.8 42.1 49.2 59.4 69.6

Daily wages for craftsmen and operatives in the manufacturing sector (HK$) Year 1983 1985 1990 1993

Nominal

Real

81 98 184 248

89.8 92.2 101.5 101.1

Source: Industry Department, Hong Kong’s Manufacturing Industries 1994.

Indexes for capital stocks and capital-labour ratio in the manufacturing sector (1990=100) Year

Capital stocks

1983 1985 1990 1992

63.4 67.3 100.0 90.4

Notes:

Capital–labour ratio 51.6 56.5 100.0 116.4

The author is grateful to the Census and Statistics Department for providing the figures on capital stocks although their publication is not encouraged. Capital stocks figures are sourced from the Industrial Production Survey conducted by the Census and Statistics Department. Figures are then deflated and indexed to obtain a series of capital stocks figures at constant (1990) prices in indexes. For the capital– labour ratio, real capital stocks are divided by the number of persons engaged in the manufacturing sector before they are indexed. The number of persons engaged used here is sourced also from the Industrial Production Survey to ensure consistency. Source: Census and Statistics Department, unpublished figures.

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ASIA’S BORDERLESS ECONOMY

Table 2.2 Factor endowments in Hong Kong and Taiwan (continued) TAIWAN Labour engaged by economic sector (%) Year 1960 1970 1980 1990 1993

Manufacturing

Services

14.8 20.9 32.7 32.0 28.4

29.3 35.3 38.1 46.3 49.4

Labour productivity vs Labour cost (index) (1991=100.0) 1978 1980 1985 1990 1993

Productivity 48.9 50.9 60.1 90.0 108.4

Labour Cost 27.3 41.0 58.0 92.4 116.1

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book 1994.

Capital stocks and capital–labour ratio in the manufacturing sector at constant (1986) prices Year

Capital stocks (US$ million)

1961 1970 1980 1990 1991

4 196 8 289 25 906 66 384 74 923

Capital–labour ratio (US$) 7 8 12 25 28

993 652 117 079 695

Source: Accounting and Statistics of the Executive Yuan, The Trends in Multifactor Productivity.

Factor Endowments Factor endowments determine complementarity, which is the ultimate driving force of the formation of the SCEZ. The difference in factor endowments therefore plays a crucial role in the economic cooperation between Hong Kong, southern China and Taiwan. Hong Kong Labour Table 2.2 shows that the relative share of the number of persons engaged in the manufacturing sector decreased from 49.7 per cent in 1976 to 20.3 per cent in 1993. In absolute terms, it also fell from the peak of 892 000 in 1980 to 508 000 in 1993.

THE SOUTH CHINA ECONOMIC ZONE

35

Nevertheless, labour shed by the manufacturing sector has been absorbed by the services sector, the relative share of which rose from 39.8 per cent in 1976 to 69.6 per cent in 1993. Absolute numbers rose from 619 000 to 1 722 000 over the same period. Given the tight labour market conditions, manufacturers are faced with the problem of rising wages. Real daily wages7 for craftsmen and operatives in the manufacturing sector rose from HK$89.8 in 1983 to HK$101.1 in 1993, equivalent to a per annum growth rate of 1.2 per cent. Although the increase did not seem severe, the situation was worsened by the high inflation experienced in Hong Kong during the period. Nominal daily wages actually increased from HK$81 to HK$248 over the same period, an 11.8 per cent increase per annum. The existing wage differential between Hong Kong and other low-wage countries would mean a fall in attractiveness. Pressure on manufacturers to search for a cost-saving production base was apparent. Capital Hong Kong has built up a large capital stock after decades of development. However, figures on capital stocks are not published.8 Real capital stocks9 (at 1990 prices) in the manufacturing sector increased by 46.0 per cent between 1983 and 1992, in contrast to the negative growth of the labour force in the manufacturing sector during the period. As a result, the indexed capital–labour ratio has been rising in the manufacturing sector. In 1983, it was 51.6. In 1992, it rose to 116.4, implying that production in Hong Kong is getting more capital intensive. This is in line with the general belief but is proved here in a quantitative manner. Land Hong Kong is a compact city of 1078 square kilometres, less than 40 per cent of which is arable. For this reason, land was scarce even before the economic take-off. Since the 1960s, when sustained rapid growth took place, property prices have risen exponentially and the territory has become one of the most expensive places in the world. The continuous increase in land prices also means an increase in production costs, which reduces the attractiveness of Hong Kong as a production base. Factories and industries, particularly those landintensive ones, have to be relocated to other places where land is cheap and abundant in supply. Comparative advantage of Hong Kong Hong Kong is a densely populated city where labour intensity has been high. This explains why Hong Kong has been engaged in industries with a high labour content. However, after decades of sustained growth, labour has become scarce and tight. Wages are going up, eroding the competitiveness of the manufacturing sector. Besides, with the opening up of China, Hong Kong has resumed her original position as an entrepôt.

36

ASIA’S BORDERLESS ECONOMY

This has boosted the services sector at the expense of the manufacturing sector. At the same time, capital accumulation has been high. The capital–labour ratio has increased, indicating that the comparative advantage of Hong Kong is changing from labour-intensive production to capital-, technology- and skill-intensive production. Taiwan Labour Like Hong Kong, Taiwan is faced with the problem of labour shortage. This has resulted from the expansion of both the manufacturing and services sectors together with the slowdown in the growth of the labour force. In line with Taiwan’s industrialization policy, the manufacturing sector expanded in both absolute and relative terms until 1989. Its relative share increased from 14.8 per cent in 1960 to 33.9 per cent in 1989. This was a crucial difference between the manufacturing sector of Taiwan and that of Hong Kong: the workforce of the former continued to expand until 1990, while the workforce of the latter reached its peak in 1980. While Hong Kong moves towards a services economy, Taiwan continues to use industrialization as its major growth pillar. Since 1990, the relative size of the manufacturing sector has declined. In 1993, 28.4 per cent of the workforce was employed in the sector, while the services sector absorbs 49.4 per cent of the total. Turning to labour costs, the labour cost index increased from 27.3 in 1978 to 116.1 in 1993, an average growth rate of 10.1 per cent per annum in real terms. The average monthly wage in Taiwan was in fact the fourth highest in Asia, following Japan, Hong Kong, and Singapore. More importantly, wage increase has been faster than productivity growth. The productivity index rose from 48.9 in 1978 to 108.4 in 1993, an annual growth of 5.5 per cent. As productivity growth fell short of wage increases, that would imply a fall in competitiveness. Capital As in Hong Kong, capital accumulation has been rapid. For Taiwan, the rate of capital formation is even more amazing because Taiwan continues its industrialization using capital-intensive production methods. Capital stocks of the manufacturing sector of Taiwan (at 1986 prices) amounted to US$74 923 million in 1991. Compared with US$4196 million in 1961, this was equivalent to an average rate of 10.1 per cent in real terms. The capital–labour ratio rose accordingly from US$7993 in 1961 to US$28 695 in 1991, suggesting that production in Taiwan is getting more capital intensive in line with its changing comparative advantage.

THE SOUTH CHINA ECONOMIC ZONE

37

Land Land prices in Taiwan as a whole rose at a moderate pace. The housing index of Taiwan increased at 1.89 per cent per annum in the 1980s. Although the increase was mild, it was a country-wide index. If we concentrated on such areas as central business districts or prime industrial sites, the increase would be much higher. This is another factor that erodes the competitiveness of Taiwanese products. In order to survive, Taiwan has to move to high value-added production and/or to relocate sunset industries abroad. Comparative advantage of Taiwan The economic take-off of Taiwan was initiated by the export of labour-intensive products. Labourintensive production quickly moved the economy to full employment levels. In response to escalating wages, strategic industries were identified. Products are now mainly capital-intensive, high-technology heavy manufactures. Southern China Labour Table 2.3 shows that the labour force of Guangdong amounted to 34.3 million in 1993, compared with 27.3 million in 1985. Although this translated to a growth rate of 2.9 per cent, which was slightly higher than those of Hong Kong and Taiwan, the absolute increase it represented was much larger because of the huge population base. For Fujian, the workforce rose from 11.5 million in 1985 at an average per annum rate of 3.6 per cent to 15.3 million in 1993. It is rightly said that the labour supply in southern China is abundant. Of the total labour force in Guangdong, 21.5 per cent of them were in the industry sector in 1993, while 43.7 per cent were still in the primary sector. For Fujian, the industrial sector employed 17.1 per cent of the total and the primary sector employed 53.6 per cent. Compared with Hong Kong and Taiwan, the relative share of labour engaged in the industrial sector was still small and that engaged in the primary sector was enormous. There is much room for industries to expand in southern China. The two provinces are not only characterized by abundant labour supply, but also a large amount of ‘surplus labour’ in the primary sector or in state enterprises of the industry sector.10 As a result, wages remain relatively low. The average industrial wage was RMB5455 in 1993, having increased at 15.6 per cent per annum from RMB620 in 1978. In Fujian, the average annual industrial wage rose from RMB541 in 1978 at 13.4 per cent per annum to RMB3577 in 1993. The average wage of a Chinese worker is only one-fifth that of a Hong Kong worker and one-third that of a worker in Taiwan. Because

38

ASIA’S BORDERLESS ECONOMY

Table 2.3 Factor endowments in southern China Labour force (’000) Guangdong Year 1985 1990 1992 1993

Total 27 31 33 34

Fujian

Primary (%) Industrial (%)

311.1 181.0 672.1 339.1

60.1 52.7 47.0 43.7

15.7 19.0 20.8 21.5

11 13 14 15

Total

Primary (%) Industrial (%)

520.9 483.8 896.1 314.2

61.6 58.4 56.3 53.6

14.4 15.2 16.5 17.1

Average annual wage and average annual industrial wage (RMB) Guangdong Fujian Year

Overall

Industrial

Overall

Industrial

1978 1980 1985 1990 1991 1992 1993

615 789 1393 2929 3312 4027 5327

620 804 1389 3023 3495 4178 5455

567 703 1059 2162 2420 2780 3480

541 691 1023 2170 2461 2860 3577

Capital stocks and capital–labour ratio in the industrial sector Guangdong Fujian Year 1980 1985 1990 1992 1993

Capital stocks Capital–labour (RMB million) ratio (RMB) 32 59 138 223 275

581 257 080 753 289

10 366 13 817 23 285 31 891 37 250

Year

Capital stocks Capital–labour (RMB million) ratio (RMB)

1986 1987 1988 1989 1990

9 6 9 11 10

168 946 590 051 288

5526 3744 4814 5576 5009

Note:

Capital stocks are expressed at constant 1978 prices through deflating estimated nominal capital stocks by overall retail price index. Source: State Bureau of the People’s Republic of China, China Statistical Yearbook, various issues.

of the wage differential, southern China continues to be an attractive place for the sunset industries of Hong Kong and Taiwan to relocate. Capital China does not compile capital stocks figures. Capital stocks of Guangdong and Fujian have to be estimated based on equation: K = vY

(1)

Equation (1) is an identity, stating the relationship between capital (K) and output (Y). The two variables are linked by a parameter, v, the capital–output (K/Y) ratio. Differentiating equation (1), we have

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THE SOUTH CHINA ECONOMIC ZONE

dK = I = v dY

(2)

where I represents investment in the manufacturing sector.11 Rearranging the above equation, we have dK I v = ––– = ––– dY dY

(3)

The series dYt represents changes in manufacturing output, obtained by Yt – Yt–1. The series It is the gross fixed capital formation in the manufacturing sector, available from government statistics.12 Hence, we can estimate the parameter, v.13 Substituting the estimated v into equation (1), we obtain the series for capital stocks. Conventionally, there are two methods of estimating the capital– output ratio, v. One directly substitutes dYt and It into equation (3), giving the series vt. Making use of the estimated vt, we obtain Kt. The advantage of this method is that it allows the capital–output ratio to vary over time.14 The disadvantage, on the other hand, is that the estimated Kt will be volatile because It is volatile by nature and is sensitive to changes in the external environment. The second method requires regressing It on dYt to obtain the coefficient v. Substituting the estimated v and actual Yt into equation (1), we have the series Kt. The advantage of this method is that the estimated capital stocks tend to be smooth, but the method suffers from v being assumed to be a constant. A closer examination of the two methods allows us to recognize that the first method is self-defeating, although it has the advantage of allowing v to vary over time. However, if v changes over time, differentiating equation (1) will give: dK = v dY + dv Y instead of equation (2). If v is not a constant, it cannot be estimated by direct substitution as suggested by method 1. In Appendix 2.1, it is shown that method 2 is superior to method 1 in terms of estimation errors, based on Hong Kong figures.15 For these reasons, we use method 2 to estimate the capital stocks of Guangdong and Fujian. The period under analysis starts in 1983 and ends in 1993. Both series, Yt and It, are expressed in log-levels to ensure consistency with equation (2)16 and are in constant prices.17 In view of the presence of autocorrelation, order correction is needed. It lagged by one period is added on the right-hand side. For Guangdong, estimation results are:

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ASIA’S BORDERLESS ECONOMY

It = 1.5029 dYt + 0.8991 It-1 (5.6757) (8.0023) R2 = 0.9731; R2(BAR) = 0.9548; DW = 2.1345; F = 178.2244; LM(1) = 0.4580; RESET = 2.2567; N(2) = 0.1277; W(1) = 0.0045632. Values in parentheses are t-ratios.18 For Fujian, estimation results are: It = 1.6775 dYt + 0.9071 It-1 (4.6901) (6.9987) R2 = 0.9043; R2(BAR) = 0.8754; DW = 1.7808; F = 105.0146; LM(1) = 0.7750; RESET = 3.5551; N(2) = 1.0980; W(1) = 0.0122. Values in parentheses are t-ratios. The estimated v for Guangdong and Fujian are 1.5029 and 1.6775 respectively. Capital stocks in Guangdong are estimated to be RMB32 581 million for 1980, rising at an average per annum rate of 17.8 per cent to RMB275 289 million in 1993. The capital–labour ratio also rose from RMB10 366 to RMB37 250 during the period. Similarly, in Fujian, capital stocks of the province are estimated at RMB9168 million for 1986, increasing at an annual rate of 2.9 per cent to RMB10 288 million in 1990. As labour grew at an even higher rate, the capital–labour ratios fell from RMB5526 to RMB5009 during the period. As the capital–labour ratio for the two provinces (especially that for Fujian) were still substantially lower than those of Hong Kong and Taiwan, the comparative advantage of southern China in producing labour-intensive products is unambiguously illustrated. Comparative advantage of southern China As a neighbour of Hong Kong and Taiwan, southern China is still a relatively labour abundant and capital scarce place. Consequently, southern China absorbs a significant portion of industries that have high labour content from the two Asian NIEs. Major industries in southern China resemble those in Hong Kong and Taiwan one or two decades ago. The comparative advantage of southern China lies in the production of labour-intensive products with low capital content and standardized technology.

THE SOUTH CHINA ECONOMIC ZONE

41

Revealed Comparative Advantage In this section, Revealed Comparative Advantage (RCA) is used to further ascertain the comparative advantages of Hong Kong and Taiwan. RCA, an index founded by Balassa (1965), shows the comparative advantage of one country in producing a certain good at a particular time. Movements of the index therefore indicate how the comparative advantage of the country changes over time. RCA is, by definition, a ratio of the export share of a commodity in a country to the export share of that commodity in the world. That is, Exports of Good X in Country Y World Exports of Good X RCA= ––--––––––––––––––––––––––––––– ÷ –––––––––––––––––––––––– Total Exports of Country Y Total World Exports

If the RCA index of a commodity for a country is greater than 1.0, the country has a comparative advantage in producing and exporting that commodity, and vice versa. Table 2.4 shows the RCA indexes of Hong Kong and Taiwan in different categories of goods in some selected years between 1970 and 1989. Hong Kong has enjoyed a comparative advantage in producing Unskilled Labour Intensive Goods (ULIG),19 as the index is always unambiguously greater than 1.0. The RCA index was 7.10 in 1970, but fell to 5.74 in 1985. In 1988, however, it rose to 6.40. In 1989, it rose further to 7.72 This does not mean Hong Kong should concentrate on producing goods in the ULIG category. Rather, the rise is the result of the relocation of production bases into mainland China, enhancing the competitiveness of these goods. This category of goods accounts for a very significant share of Hong Kong’s exports—80.55 per cent in 1970. The share has been declining since then. In 1989, nevertheless, it still represented 53.70 per cent of the total exports of Hong Kong. Turning to another category of goods, Human Capital Intensive Goods (HCIG),20 the RCA index rose from 0.49 in 1970 to 1.92 in 1989, implying that Hong Kong now has a comparative advantage in producing knowledge and skills-intensive goods. Export share also rose unambiguously from 6.82 per cent to 11.90 per cent during the same period. Within the HCIG, a sub-division SITC 775 (household equipment, both electrical and non-electrical) is identified, the RCA index of which rose from 2.21 in 1976 to 16.03 in 1989. This indicates that Hong Kong is gaining a strong foothold in exporting household equipment. Hong Kong also showed improvement in producing Technology Intensive Goods (TEIG),21 as both the export share and the RCA index increased during the period between 1970 and 1989; the former rose

Table 2.4 Export shares and revealed comparative advantage (RCA) indexes HONG KONG Categories of goods by factor intensity and SITC Code 1970

TAIWAN

1976

1980

1985

1988

1989

1977

1980

1985

1988

Unskilled labourintensive goods 84

80.55% (7.10) 2.78% (16.64)

73.41% (6.91) 3.41% (20.09)

62.52% (6.48) 2.53% (16.12)

60.35% (5.74) 2.24% (11.03)

51.64% (6.40) 14.09% (7.78)

53.70% (7.72) 14.51% (10.05)

59.42% (7.40) 14.31% (8.26)

59.18% (6.14) 12.25% (7.81)

58.66% (5.58) 11.43% (5.64)

51.83% (7.46) 7.77% (4.29)

89 (except 896 & 897)

21.02% (11.35) 6.82% (0.49) N.A.

11.97% (6.54) 10.67% (0.70) 1.00% (2.21) 19.55% (2.06) 11.63% (2.13) 3.33% (0.18) 2.48% (0.25)

11.36% (6.85) 17.12% (1.23) 2.15% (5.08) 16.33% (1.59) 6.57% (2.20) 3.90% (0.23) 2.70% (0.31)

10.55% (5.59) 13.91% (0.87) 2.56% (5.46) 20.26% (1.95) 7.13% (1.80) 7.55% (0.44) 4.66% (0.55)

10.28% (6.33) 12.79% (1.93) 2.09% (13.12) 23.80% (2.46) 7.27% (1.98) 8.44% (0.68) 5.55% (0.86)

10.86% (7.12) 11.90% (1.92) 1.95% (16.03) 23.12% (2.59) 7.07% (1.97) 8.00% (0.70) 5.39% (0.91)

10.48% (4.64) 10.84% (0.70) 0.66% (1.43) 17.41% (1.67) 5.79% (1.48) 6.34% (0.36) 4.06% (0.42)

11.19% (5.44) 11.31% (0.81) 0.96% (2.27) 18.64% (1.81) 6.10% (2.05) 7.21% (0.43) 4.48% (0.52)

11.87% (5.14) 12.56% (0.78) 1.69% (3.61) 20.12% (1.44) 7.63% (1.93) 8.23% (0.48) 5.22% (0.61)

12.05% (8.57) 12.59% (2.03) 1.46% (9.18) 27.12% (3.04) 7.36% (2.00) 9.68% (0.84) 6.72% (1.14)

Human capitalintensive goods 775 Technologyintensive goods 77 (except 775) Physical capitalintensive goods Non-electrical machinery (71, 72, 73, 74 & 751)

16.37% (1.59) 9.18% (1.76) 2.69% (0.13) 1.52% (0.14)

Note: Percentages are export shares and figures in parentheses are RCA indexes. Source: Compiled by the Centre of Asian Studies of the University of Hong Kong and the author.

THE SOUTH CHINA ECONOMIC ZONE

43

from 16.37 per cent to 23.12 per cent, whereas the latter increased from 1.59 to 2.59. Finally, Hong Kong did not have a comparative advantage in producing Physical Capital Intensive Goods (PCIG).22 This reflects the absence of heavy industries in the territory. The RCA index for this category has always been less than 1.0, although it rose from 0.13 in 1970 to 0.70 in 1989. Within PCIG, a sub-category of goods is identified, namely SITC 71–5 (non-electrical machinery). Hong Kong does not have any comparative advantage in producing it either, but its RCA was actually approaching 1.0 in 1989. The emerging trend is that Hong Kong is at least making progress in this area. More importantly, the improvement is supported by the increase in export share during the period. In the case of Taiwan, ULIG also accounted for a large proportion of exports. In 1977, it was 59.42 per cent. In 1988, it was still as large as 51.83 per cent. Therefore, although Taiwan is moving towards technology- and capital-intensive production, labour (unskilled) intensive products continue to be crucial to the economy. The RCA index of the ULIG category of goods fell from 7.40 in 1977 to 5.58 in 1985, but rose to 7.46 in 1988. This can be explained by the relocation of outdated industries to low wage countries, maintaining the competitiveness of these goods. By 1988, Taiwan had successfully gained a comparative advantage in HCIG, the RCA index of which rose from 0.70 in 1977 to 2.03 in 1988. The export share also rose steadily from 10.84 per cent to 12.59 per cent over the period, indicating that it is gaining importance. TEIG accounted for 27.12 per cent of Taiwan’s total exports in 1988, compared with 17.41 per cent in 1977. This largely reflects the industrial policy of the government, which stresses the importance of high technology industries. The RCA index of this category rose from 1.67 in 1977 to 3.04 in 1988. Like Hong Kong, Taiwan does not have any comparative advantage in producing PCIG, the RCA index of which has always been less than 1.0. But, unlike Hong Kong, Taiwan does have a comparative advantage in manufacturing non-electrical machinery. The RCA index for the sub-category was 1.14 in 1988. The export shares of PCIG and the sub-category of non-electrical machinery rose during the period; the former from 6.34 per cent to 9.68 per cent and the latter from 4.06 per cent to 6.72 per cent, showing that the country is making progress in this area.

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Complementarity in the South China Economic Zone It is evident that both Hong Kong and Taiwan are gaining comparative advantages in capital-, technology- and skills-intensive products as indicated by the RCA indexes. These changes echo the changing factor endowments we have just examined. Notice that although both places continue to possess comparative advantage in producing labourintensive products, that was due to use of the hinterland in southern China. Although Hong Kong and Taiwan do not have cheap labour and cheap land themselves, they are able to obtain these resources in southern China, supporting the production there with various services, sophisticated infrastructure, high technological capability and abundant capital. Dictated by their factor endowments, the three places are highly complementary to each other. The three places are, in fact, also complementary to each other in another sense. Taiwan has accumulated huge trade surpluses during the past decade or so. Yet investment opportunities in Taiwan are limited. Southern China, at the stage of economic takeoff, needs capital to finance its development program. Hong Kong, as a financial center, has good experience in recycling funds. With the three areas cooperating, the trade surplus problem in Taiwan and the problem of shortage of funds in China can be solved. Hong Kong also benefits by strengthening its position as a financial centre in the region. Finally, China and Taiwan are two politically hostile but economically complementary places. Huge economic benefits can be reaped if they cooperate. Without any formal diplomatic relationship, trade and investment have to be handled by a third party. Hong Kong has long experience in entrepôt trade, a close relationship with both China and Taiwan, sophisticated infrastructure and refined telecommunication and transportation networks in the region. It naturally fits the role of middleman between China and Taiwan. It should be noted that complementarity existed long before the formation of the SCEZ as there have always been differences in factor endowments. However, cooperation in the past was characterized by the flow of primary commodities from southern China to Hong Kong and Taiwan, and the flow of manufactured products in the reverse direction. Now, complementarity has broadened to include industrial production. Within an industry, the three areas each specialize in different aspects of the production line. As a result, a sophisticated pattern of subregional division of labour has emerged. The significance of is three-fold. First, the industrialization of one country will lead to the industrialization of the others, reinforcing and enhancing the dynamism within the zone. Secondly, because of the transfer of intermediates and final products, trade between these places will

THE SOUTH CHINA ECONOMIC ZONE

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increase, giving a further push to trade-related sectors. Thirdly, significant economies of scale will result from greater specialization and a finer division of labour within the region. The essence of a subregional economic zone is that economies with different factor endowments have different comparative advantages so that they are complementary to each other, and the merging of these economies enhances competitiveness and self-sufficiency. It is evident that the three regions have continued to grow remarkably over a sustained period in the early 1990s despite the deep and prolonged recession in the West. The traditional development model based on large-scale exports of labour-intensive light manufactures to Western industrialized countries must go now in hand with, if not be replaced by, a new development model: neighbouring countries23 at different stages of economic development integrate with and become interdependent on each other, sharing markets, labour, capital, land, information, technology and infrastructure. The resulting economies of scale sustained economic growth in the difficult 1980s, and growth continues into the 1990s. Political factors and government policy It has been mentioned that Hong Kong, Taiwan and southern China were complementary to each other prior to the formation of the SCEZ. Rapid developments, however, only took place in the 1980s because of the political and policy changes occurring in China from the late 1970s. The fall of the Gang of Four in 1976 signified the end of the ultra-leftist leadership in the country. Since then, more liberal political and economic policies have been adopted. In 1978, China began to reopen its doors to the outside world so as to facilitate its Modernization Program. In 1980, four special Economic Zones were established—Shenzhen, Zhuhai and Shantou in Guangdong Province and Xiamen in Fujian Province. Under the Open Door Policy, foreign investment and trade are encouraged. Various measures have been formulated to promote foreign direct investment. Foreign enterprises can enjoy full autonomy in management and can engage in direct business dealings or may operate through an appointed agent. In addition, foreign enterprises have priority access to water and electricity supplies and communication facilities. Tax concessions and provision of land are also used to attract foreign direct investment. The infrastructure necessary for economic activities is steadily developing. More importantly, the provinces have been granted limited powers by the central government to determine their own economic policies, giving them the flexibility to pursue policies that suit local needs, as well as the freedom to promote external economic cooperation.

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The most important feature of the policy is that it removes restrictions on trade and capital flows, improves the investment environment and reduces government bureaucracy. Geographical proximity Geographical and cultural conditions also favour the development of closer economic relations between Hong Kong, Taiwan and southern China. Geographically, Hong Kong is on the border of Guangdong while Taiwan and Fujian are only separated by the Strait of Taiwan. Many Hong Kong residents originated in Guangdong and therefore share the dialect and customs of the people in that province. Similarly, there is little difference in terms of language between people in Taiwan and Fujian. Geographical proximity becomes an important concern when there is a need to minimize transportation costs. This is particularly important to the emergence of the SCEZ because foreign direct investment within the zone is mostly in the form of outward processing requiring the flow of intermediates and final products between Hong Kong and southern China. Transportation costs and delivery are therefore crucial. It is also geographical proximity which differentiates subregional economic cooperation from the traditional type of economic cooperation. Because geographical proximity is an important concern, economic zones only involve subregions of countries rather than the entire countries. Prospects for growth in the South China Economic Zone Expansion into new geographical areas Geographically, the SCEZ will expand both northward and westward into the inland areas of mainland China owing to escalating land prices and wages in southern China. This trend has actually been going on for some time. The economic transformation and industrial restructuring of the early 1980s saw Hong Kong shift its traditional industries across its borders. Coupled with the Open Door Policy of China and the setting up of Special Economic Zones, Shenzhen was the first area to be affected. As wages and land prices in Shenzhen rose with development, the processing zone enlarged to the Pearl River Delta region and later to the whole of Guangdong and even Hainan and Fujian. Given its dynamism, the SCEZ is bound to expand in size, incorporating more provinces and giving rise to new complementarities. The services sector

THE SOUTH CHINA ECONOMIC ZONE

47

in the south is to be improved to accommodate the expanding need from the north. Hong Kong and Shenzhen will then be the centres of coordination for the enlarged growth zone. Yet there are limits to the expansion of the SCEZ. As the SCEZ increases in size, communication and coordination become more expensive. Transportation costs rise as the zone covers a larger area. When transportation costs arising from further expansion outweigh costs reduction due to cheaper nearby labour, expansion of the SCEZ will cease. In the services sector, however, cooperation is less affected by geographical distance because output (i.e. services) is intangible and the services provided are mostly for local consumption. Transportation costs are consequently not an important concern. For instance, with the opening up of the services sectors in China in 1992, foreign banks rushed to set up representative offices in the mainland establishing bases as far away as Dalian and Wuhan. Wherever the representative offices are located, they tend to follow the practices of banks in Hong Kong. In fact, the banking systems of all major cities in the mainland are modelled on Hong Kong. The ‘Hong Kong effect’ is not confined to the SCEZ but extends to the entire country. That is to say, although cooperation in the manufacturing sector is limited to the southern part of mainland China, cooperation in the services sector will be far less restricted by geography. A new dimension of cooperation While cooperation in the SCEZ is intensive, it is still in its infancy. Cooperation is largely confined to outward processing and the trade associated with it. Outward processing factories accounted for 43.2 per cent of total Hong Kong establishments in China at the end of 1992 mainly because this kind of investment involves low risk and short terms of contract. However, these factories tend to produce low value-added and labour-intensive manufactured goods. Technology transfer is limited. As a consequence, the products produced are traditional—those being phased out in Hong Kong. The scope for product upgrading is enormous. Cooperation is moving towards the production of more sophisticated output. Instead of concentrating on labour- and landintensive processes, China must engage in more capital-intensive aspects of production. This does not mean competition with Hong Kong and Taiwan. Rather, it represents a further division of labour within the Pearl River Delta. While better developed cities such as Shenzhen and Guangzhou carry out the relatively capital-intensive procedures, other parts of Guangdong, Hainan, Fujian and even Zhejiang continue to be responsible for labour- and land-intensive processes.

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Expansion into new sectors The scope of cooperation between Hong Kong and southern China is bound to increase, most probably in the services sector. It has already been the case that businessmen from Hong Kong and Taiwan are penetrating into the services sector of the mainland. In wholesale and retail trade, Goldlion and Giodano are popular brand names. In the food and restaurant sector, Cafe de Carol and Fairwood have set up their extensive networks in southern China and are extending towards the north. In the banking industry, Hongkong Bank and Bank of East Asia have set up branches and representative offices in major cities of China. In real estate development, Sun Hung Kai and Henderson Land have increased their involvement. Even in infrastructural projects, Hopewell and Cheung Kong are also active participants. These are just some examples that indicate the strong interest of Hong Kong investors in the expanding market of China. Hong Kong investments in China are moving from the involvement of small or medium-sized firms in the industrial sector to participation by large corporations (including listed companies) in all sectors. As economic transformation in Hong Kong and reforms in China continue, investment from Hong Kong in the mainland becomes increasingly diverse. A new form of market-driven cooperation The SCEZ is essentially concerned with economic integration. Ascending levels of economic integration can be defined as follows: a b c d

Free Trade Area Trade barriers among participating countries are eliminated, but each country retains its own restrictions on trade against non-member countries; Customs Union Members within the union enjoy a free trade status and adopt a uniform trade policy against nonmember countries; Common Market There is free flow of goods, capital, labour and information among the members of the common market and a uniform policy against non-member states; Economic Union In addition to the free flow of goods, capital, labour and information, members unify on monetary, fiscal and tax policies.

The level of economic integration the SCEZ attains depends on interacting economic and political forces. Given the complementarity of the three economies, economic cooperation between them is bound to increase. Economic transformation in Hong Kong and Taiwan will continue into the future. The vast hinterland in southern China is

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49

clearly crucial. As a source of supply China is also important, especially to Hong Kong. Prices of food, raw materials, and even manufactured products from China are competitive. In order to industrialize its economy, China is reliant on foreign capital to stimulate production and raise productivity; to repay its foreign debt it has to export on a large scale; and to raise the standard of living, it must create well-paid jobs for its people. To achieve these ends China must continue the Open Door Policy. China and Hong Kong are bound to have a closer political relationship following China’s resumption of sovereignty over Hong Kong in 1997. The relationship between Taiwan and China, however, is not so well defined.24 The ultimate problem for China and Taiwan is whether to unite or not. In view of the huge gap between them in terms of political and economic systems, stage of economic development, living standard and social values, unification would not be possible even in the medium term. As their economic relationship depends heavily on political developments, their economic cooperation is likely to grow in a contained manner. The economic relationship between Hong Kong and Taiwan is affected as a consequence. This in turn becomes the most damaging obstacle to the growth and development of the SCEZ. The Chinese and Taiwanese governments are in fact hostile to each other. Neither recognizes the other as a legitimate sovereign state. For this reason, the SCEZ is not likely to attain any of the four levels of economic integration listed above. However, this does not mean the SCEZ will stay in an immature stage of cooperation. Rather, it implies that economic integration at government level will not be possible. All will be driven by the market and private initiatives as in the past. However, this does not preclude government participation which will be particularly important if negotiation involves infrastructural development. Infrastructure tends to be under-produced if it is left to the private sector. Government participation in the improvement of infrastructure may indicate a commitment to closer economic cooperation. Already, despite the row between China and Britain, a working group, the Sino-British Co-ordinating Committee on Major Cross-Border Infrastructure, has been officially set up for major infrastructural projects that straddle the border. It seems that cooperation is still initiated by the private sector but there is some evidence of government involvement and commitment. The challenge from the Yangtze region Any analysis on the prospects of the SCEZ would be incomplete if one ignored the challenge from other emerging growth zones such

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as the Yangtze region. The Yangtze region refers to Shanghai and the six provinces along the middle-lower Yangtze River—Jiangsu, Zhejiang, Hunan, Hubei, Jiangxi and Anhui. The whole region covers an area of 915 000 square kilometres, inhabited by a population of 338 million (at the end of 1991). The region accounts for 30 per cent of the population of China, 20 per cent of GNP, 30 per cent of industrial output, 25 per cent of agricultural output and 18 per cent of merchandise exports. In early 1992, the Chinese government accelerated the growth of the Yangtze region by opening up the Pudong development zone in Shanghai to foreign investment. Since then, foreign capital has rushed into the Yangtze region. As the SCEZ is investment driven, it is doubtful whether the emergence of this new growth zone will divert foreign investment from the SCEZ and affect its growth. According to the Federation of Hong Kong Industries’ 1993 survey,25 most Hong Kong manufacturers did not know much about the Yangtze region. More than half of the respondents (57.4 per cent) were unable to give a general impression of the investment environment of the region. Besides, a majority of the respondents (89.7 per cent) did not have any investment in the region. Only 38 respondents (8.1 per cent) had investments there. The most common reasons quoted by them for not investing in the region were first, that the region was too far away from Hong Kong and did not facilitate management and support from Hong Kong; and secondly, except for a few coastal cities, the investment environment of the region was still immature compared with Guangdong. The lack of information about the region and the lack of local connections are also important factors that discourage investment from Hong Kong in the Yangtze region. Looking ahead, the FHKI 1993 survey found that most respondents (70.6 per cent) would not consider investing in the Yangtze region while another 7.5 per cent gave no comment at all. Only the remaining 21.9 per cent said they would consider investing there. In view of these results, it appears that southern China remains the focal point of Hong Kong manufacturers in terms of investment destination. The geographical proximity factor, the general investment environment, the ancestral connections and the established business links between Hong Kong and southern China will ensure that the dynamism of the SCEZ will continue. Table 2.5 shows that foreign direct investment in the Yangtze region in 1989 was US$672.9 million. It rose at an average annual rate of 58.7 per cent to US$2686.9 million in 1992. The region accounted for 23.8 per cent of the country’s total foreign direct investment in 1992. Turning to the SCEZ, foreign direct investment rose from US$1766.2 million to US$5577.3 million during the same

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Table 2.5 Foreign direct investment in the Yangtze region and the South China Economic Zone (US$ mil.)

The Yangtze region The South China Economic Zone China

1989

1990

1991

1992

672.88 17.83% 1766.24 46.81% 3773.45

453.95 12.09% 2005.22 53.40% 3754.87

558.93 11.98% 2590.76 55.52% 4666.61

2686.85 23.80% 5577.30 49.39% 11291.62

Note:

The Yangtze region includes Shanghai, Jiangsu, Zhejiang, Hunan, Hubei, Jiangxi and Anhui. The South China Economic Zone includes Guangdong and Fujian. Source: State Statistical Bureau, Statistical Yearbook of China, various issues.

period, equivalent to an annual growth rate of 46.7 per cent. Although the growth rate was slower than that of the Yangtze region, it was still higher than the country average of 44.1 per cent. Foreign direct investment in the SCEZ constituted 49.4 per cent of the total in 1992. Foreign direct investment in both growth zones increased at an amazing rate and was higher than the country’s average. Both zones accounted for an increasing share of foreign direct investment in the country. Although foreign direct investment in the Yangtze region grew faster than that in the SCEZ, there is little concrete evidence suggesting that investment has been diverted from the latter to the former on any significant scale. This is particularly true because foreign direct investment in the Yangtze region started from a much smaller base compared with the SCEZ. In addition, one should not overlook the benefits for the SCEZ associated with the growth of the Yangtze region. Faster development in the north may raise the demand for services in the south. At the same time, quicker infrastructural development in the Yangtze region also shortens the ‘distance’ between the SCEZ and the Heilongjiang region, which is conducive to the development of the whole country. Besides, the rising living standard in the Yangtze region reduces the income disparity between the southern area and the rest of the country, allowing the country to develop in a more balanced and healthy manner. The challenge from the Growth Triangle Apart from the challenge of the Yangtze region, the SCEZ also faces the challenge from other subregional economic zones. A prominent competitor is the Growth Triangle comprising Singapore, Johor in Malaysia and Riau in Indonesia. Because comparative data on the

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SCEZ and the Growth Triangle are not available, we compare instead investment in Greater China and the JSR Triangle.26 Table 2.6 shows foreign direct investment from Japan in the two zones. Japanese investment in Greater China rose from US$1504 million in 1991 to US$2929 million in 1993. On the other hand, Japanese investment in the triangle fell from US$2686 million to US$2257 million during the same period. Japanese foreign direct investment in Greater China accounted for 3.62 per cent of total Japanese outward investment in 1991. The share rose to 8.13 per cent in 1993. On the other hand, the share of Japanese investment in the triangle in its total investment fell from 6.46 per cent to 6.27 per cent over the same period. Therefore, the argument that the triangle has diverted investment from Greater China is not valid as far as Japan is concerned. Similar observations may be made about the outward investment of Australia. For the year ended 30 June 1990, total Australian outward investment in Asia-Pacific Economic Cooperation (APEC) amounted to A$46 559 million. It rose by 7.97 per cent to A$50 272 million for the year ended 30 June 1992. During the same period, Australian investment in Greater China increased from A$3670 million by 25.94 per cent to A$4622 million, while its investment in the triangle increased only marginally by 3.64 per cent from A$2777 million to A$2878 million. Not only the absolute amount, but also the growth rate is higher in Greater China. As Australia and Japan are the two major investors in the Asia-Pacific Region, their investment patterns, at least to a certain extent, reflect the global trend of foreign direct investment in the two zones. 27 More importantly, we have to recognize that the two zones are complementary to, rather than in competition with, each other. First, Table 2.6

Japanese foreign direct investment (US$mil.)

China Hong Kong Greater China Singapore Malaysia Indonesia The JSR Triangle WORLD TOTAL

(1) (2) (1)+(2) (3) (4) (5) (3)+(4)+(5)

(6)

1991

1992

1993

579 925 1504 3.62% 613 880 1193 2686

1070 735 1805 5.29% 670 704 1676 3050

1691 1238 2929 8.13% 644 800 813 2257

6.46%

8.93%

6.27%

41584

34138

36025

Source: Nomura Reasearch Institue, Asia Pacific Economic Outlook 3rd Quarter 1994.

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the two zones serve two different areas. The Growth Triangle serves the ASEAN countries in Southeast Asia whereas the SCEZ serves China and countries in Northeast Asia. Secondly, while the Growth Triangle is a manufacturing centre producing relatively hi-tech products, the SCEZ is a manufacturing centre producing relatively traditional and skills-intensive products. Thirdly, even in the financial sector, although both Hong Kong and Singapore are regional financial centres, they serve different hinterlands and specialize in different functions. The co-existence of the two zones in the same region does not necessarily imply a zero-sum game. As one develops, it becomes a larger market of the other. Conclusion Geographically proximate regions possessing different resource endowments tend to develop close economic links provided there are no barriers to the development of these links. The SCEZ is the case in point. Southern China has abundant cheap labour and an ample supply of land, but lacks capital, technology, managerial skills and production experience. Hong Kong and Taiwan, on the other hand, have capital, production techniques and developed industrial bases. However, they are faced with rising land prices and labour costs. The three places are complementary, and together form an economic zone. With Taiwan moving into high technology industries, Hong Kong moving towards a services economy and China industrializing her economy with labour-intensive industries, China is well placed to receive the outdated industries of Hong Kong and Taiwan. At the same time, this reduces the pain associated with the phasing-out of these sunset industries for Hong Kong and Taiwan. It also quickens the industrialization process of China, which may in turn raise demand for services from Hong Kong and raw materials and semi-manufactured products from Taiwan. Given the existing dynamism, the SCEZ is bound to expand in size and increase in level of sophistication and scope of cooperation. It is true that the SCEZ is being challenged by other growth zones. However, there is no concrete evidence suggesting that investment has been diverted away from the SCEZ to these zones. In fact, these zones serve different hinterlands and perform different functions and are therefore complementary to the SCEZ to a certain extent. The prospects of the SCEZ look promising.

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Appendix 2.1 Estimating capital stocks In this appendix, I intend to show that estimates of capital stocks given by method 2 outperform estimates given by method 1 (see ‘Southern China: Capital’ section in text of chapter 2). Table A.1 below shows the estimates of capital stocks of Hong Kong using method 1. We recognize that the capital stocks estimated by method 1 are not only volatile, but also have negative values.28 Negative capital stocks result when the growth in gross output is negative (i.e. when gross output falls). The problems associated with method 1 are unambiguously demonstrated. In method 2, we regress It on dYt (i.e. column (c) of Table A.1 on column (b) of the same table) to obtain v. Nevertheless, the series shown are expressed at current market prices. To give more appropriate estimates, the series are deflated so that both are expressed in terms of constant prices. Because annual data are used, seasonal dummies have not been included in the regression equation. Finally, in line with equation (2), the intercept term is also excluded from the model. The estimate of v is 0.1742. Multiplying the estimated v by column (a), we have column (b). Table A.2 below shows the estimates of capital stocks of Hong Kong’s manufacturing sector using method 2. Table A.3 contrasts the actual capital stocks with the estimates given by the two methods. A glance at the table allows us to conclude that method 2 is superior to method 1. Table 2A.1 Hong Kong’s capital stocks (method 1) Year

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Gross output (HK$ million)

Change in gross output (HK$ million)

Yt (a)

dYt = Yt -Yt-1 (b)

Gross additions to fixed assets (HK$ million) lt = dKt (c)

170681 189612 177006 277225 283340 315940 325411 322180 324218 331243

38365 18931 –12606 100219 6115 32600 9471 –3231 2038 7025

4763 5255 5357 9038 10184 13523 11790 12270 11427 12602

Capital-output Estimated ratio capital stocks using method 1 (HK$ million) vt Kt (d) = (c)/(b) (e) = (a) * (d) 0.1241 0.2776 –0.4250 0.0902 1.6654 0.4148 1.2449 –3.7976 0.1783 1.7939

21190 52634 –75220 25001 471878 131057 405089 –1223506 57824 594217

Source: Columns (a) and (c): Industry Department, Hong Kong Manufacturing Industries 1993.

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Table 2A.2 Hong Kong’s capital stocks (method 2) Year

Gross output (HK$ million)

Yt (a) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Estimated capital stocks using method 2 (HK$ million) Kt = 0.1742 * Yt (b) = 0.1742 * (a)

170681 189612 177006 277225 283340 315940 325411 322180 324218 331243

29732 33030 30835 48292 49358 55037 56687 56125 55895 57106

Source: Column (a): Industry Department, Hong Kong Manufacturing Industries 1993.

Table 2A.3 Actual capital stocks vs estimated capital stocks Year

Actual capital stocks

Estimates

Estimated capital stocks Method 1 Method 2 Error Error (%) Estimates Error Error (%)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

26402 28061 28693 34658 42224 50041 57687 61593 58795 66416

21190 52634 –75220 25001 471878 131057 405089 –1223506 57824 594217

5212 –24573 103913 9656 –429654 –81017 –347402 1285099 971 –527801

Source:

Industry Department, Hong Kong Manufacturing Industries 1993.

19.7% –87.6% 362.2% 27.9% –1017.6% –161.9% –602.2% 2086.4% 1.7% –794.7%

29732 33030 30835 48292 49358 55037 56687 56125 55895 57106

–3330 –4969 –2142 –13635 –7134 –4997 1000 5468 4900 9310

–12.6% –17.7% –7.5% –39.3% –16.9% –10.0% 1.7% 8.9% 4.9% 14.0%

We recognize that the estimate errors made by method 2 are far smaller than those made by method 1. Errors made by method 2 are generally less than 20 per cent of the actual values except for 1986. Besides, errors made using method 2 are smaller than those made using method 1, with the exception of the years 1986 and 1991. On the contrary, method 1 gives huge errors in most years and also gives negative capital stocks. From these observations, we conclude that estimates using method 2 give more accurate results. For this reason, we adopt method 2 in estimating the capital stocks of Guangdong and Fujian.

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Appendix 2.2 Description of statistics and tests R2: R2 (BAR): RSS: DW: F: LM(4): RESET: N(2): S.E.: W(1):

a measure of goodness of fit. R2 (a measure of goodness of fit), adjusted for degree of freedom. residuals sum of squares. Durbin-Watson’s d-statistic, a test for first order autocorrelation, valid only when there is no lagged dependent variable. a test for the joint significance of all slope coefficients. Lagrange Multiplier test for fourth order autocorrelation, distributed as chi-square with a degree of freedom of four. Ramsey’s RESET test for mis-specification, distributed as chi-square with a degree of freedom of one. Normality test, distributed as chi-square (two). Standard Error of the whole regression. White’s test for heteroscadasticity, a regression of the squares of the residuals on the squares of the fitted values, distributed as chi-square (one).

Notes 1 In addition to manufacturing, the secondary sector includes electricity, gas and water and construction. 2 Sir Hamish Macleod, the Financial Secretary, Hong Kong (1991–95), has pointed out that the relative share of the services sector in Hong Kong is in fact the largest in the world. 3 For a detailed exposition of the export-led growth of Hong Kong, please refer to Chen (1979) and Balassa (1988) 4 Development strategy can be broadly categorized into export orientation (EO) and import substitution (IS); strategies not mutually exclusive. The export of labour-intensive products is the so-called ‘easy’ stage of export orientation strategy, or EO1. The ‘difficult’ stage (EO2) represents a case where industrialization and growth of a country is pulled by the export of capital, technology, skills and knowledgeintensive products. The import substitution strategy can also be categorized into ‘easy’ and ‘difficult’ stages. While the former requires the replacement of imports of consumer goods by local production to stimulate industrialization, the latter urges the replacement of imports of capital goods by production of local industries. Chen (1985) gives a detailed account of these development strategies.

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57

5 See Mak (1992) on this topic. 6 Export figures of China or southern China given in this chapter come from the Ministry of Foreign External Relations and Trade (MOFERT) and the State Statistical Bureau unless otherwise stated. According to their definition of exports, fees paid to processing activities rather than value of gross output are counted. As processing operations account for a significant part of total exports, the export values severely understate the actual amount of goods exported. Statistics from Customs agencies give the export value of gross output, but such data are less accessible and not adopted internationally. 7 September 1992 is used as the base period for real daily wages. 8 Figures on capital stocks are unpublished because (as disclosed by the Census and Statistics Department) data are not accurate due to the ambiguous definition of capital in the first place and the difficulty in estimating depreciation in the second place. Figures are estimated for internal departmental use only. 9 Capital stocks at constant prices are arrived at through deflating the whole series by the deflator of gross domestic fixed capital formation. 10 By ‘surplus labour’, we refer to those whose contribution to output is minimal (i.e. marginal product almost zero). In other words, total output remains virtually the same even without the participation of the labour. 11 By definition, investment equals the change in capital stock, having ignored depreciation. 12 We use gross fixed capital formation because figures on net fixed capital formation in the manufacturing sector are not available. That is to say, we have ignored depreciation. 13 The parameter v in this sense is more commonly known as the incremental capital–output ratio (ICOR). 14 In reality, there is no reason why the capital–output ratio cannot change over time because there are changes in capital–labour ratio, labour productivity and technology. The estimated v under this method is a time-varying parameter, a parameter which varies over time. 15 Hong Kong figures are used because they are available so that estimates by both methods can be used to compare with actual figures. 16 If Yt is log-level, dYt is then the growth rate of manufacturing output. 17 Capital stocks at constant 1978 prices are derived from deflating estimated capital stocks by the overall retail price index. Ideally, the series should be deflated by a fixed capital formation deflator. However, that is not available in China at the provincial level. We therefore choose the overall retail price index. 18 The description of various statistics is contained in Appendix 2.2. 19 The classification of commodities according to relative factor intensities follows the work of Garnaut and Anderson (1980). For ULIG, it includes SITC 651–4, 657, 664–6, 81, 82, 83, 84, 85 and 89 (except 896 and 897). 20 HCIG includes SITC 55, 62, 64, 69, 775, 78, 79, 885 and 896–7. 21 TEIG includes SITC 54, 56, 57, 58, 59, 752, 759, 76, 77 (except 775), 87 and 88 (except 885). 22 PCIG includes SITC 51, 52, 67, 68, 71, 72, 73, 74 and 751.

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23 Neighbouring countries offer geographical proximity and the importance of this factor will be examined thoroughly in the following pages of the chapter. 24 Chiou (1993) writes on the relationship between China and Taiwan. 25 See FHKI (1993), Hong Kong’s Industrial Investment in China: Survey on the members of the FHKI, further details in References. 26 The Greater China here refers only to Hong Kong and China, while the Triangle refers to Singapore, Malaysia and Indonesia. 27 Readers are reminded that what is true for the Triangle and Greater China is not necessarily true for the Growth Triangle and the SCEZ, although it is believed that there is a correlation because Johor and Riau are active parts of Malaysia and Indonesia respectively, and southern China is a very important part of China in terms of contribution to output, exports and growth. 28 Negative capital stocks are theoretically, conceptually, technically, and empirically impossible.

References Balassa, B. (1965) ‘Trade Liberalization and “Revealed” Comparative Advantage’, The Manchester School, vol. 33, pp. 99–123. ——(1988) ‘The Lessons of East Asian Development: An Overview’, Economic Development and Cultural Change, vol. 20, supplement pp. 5273–290. Chen, Edward (1979) Hyper-Growth in Asian Economies: A Comparative Study of Hong Kong, Japan, Korea, Singapore, and Taiwan, Oxford University Press: Hong Kong. ——(1985) ‘The Newly Industrializing Countries in Asia: Growth Experience and Prospects’, in Scalapino, R.A. (ed.) Asian Economic Growth, Institute of East Asian Studies, Berkeley. ——(1987) Hong Kong Standard. 29 September. Chiou, C.L. (1993) ‘Relations with Taiwan’, in Cheng, J.Y.S. and Brosseau, M. (eds) China Review 1993, The Chinese University Press: Hong Kong. Federation of Hong Kong Industries (1993) Hong Kong’s Industrial Investment in China: 1993 Survey on the Members of the FHKI. Garnaut, R. and Anderson, K. (1980) ‘ASEAN Export Specialization and the Evolution of Comparative Advantage in the Western Pacific Region’, in Ross Garnaut (ed.) ASEAN in a Changing Pacific and World Economy, ANU Press: Canberra. Mak, N.K. (1992) ‘The Guangdong Economy: Another Small Asian Dragon’, Asian Perspectives, vol. 9, no. 6, December.

3

The Northeast Asian Economic Zone: potential for the latecomer Yukiko Fukagawa

Asia’s transition towards a borderless economy is a by-product of the post-Cold War era. Once the political barriers were withdrawn, traditional business relations instantly recovered without any institutional effort. In this environment, it was natural for Asia’s Newly Industrializing Economies (NIEs), with their open economic systems, high rates of capital and technological accumulation and marginal political presence to lead these changes. The superpowers had to contend with greater barriers and have found it more difficult to respond quickly. In Southeast Asia, Singapore promoted the so-called ‘Growth Triangle’ in cooperation with Indonesia and Malaysia, while in South China, investment from both Hong Kong and Taiwan has contributed to the formation of the ‘South China Economic Zone’. In this context, the Republic of Korea (ROK), one of the ‘Four Dragons,’ has tried to take the initiative in Northeast Asia (NEA), but, for the following reasons, economic integration in this region has not progressed as rapidly as in the other zones. First, unlike the other regional economies, there are many participants in NEA and there is no clear consensus as to who should and should not be included. In some cases, ‘the Northeast Asian Economic Zone’ comprises China, Russia, the ROK, the Democratic People’s Republic of Korea (DPRK), Mongolia, Japan and, sometimes, the United States, all at the national level. However, when discussing NEA, most commentators specify certain regions of large countries, such as China’s northeast provinces, Russia’s far east and Japan’s coastal area facing the Japan Sea. This complicates the business 59

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environment which still needs improvement at least by the tacit support of or possibly physical investment by the governments concerned. However, when discussing the framework for possible cooperation, it is difficult to confine economic links between countries to a particular region within those countries. For instance, even in China–Russia border trade, transactions may be dependent on successful business links to southern China or Hong Kong. Secondly, even in a broader sense of the word, NEA’s member countries all vary not only in ethnicity and culture, but also in natural resource endowment, population, economic regimes, degree of maturity in market mechanisms and levels of capital accumulation, technology and infrastructure. While these gaps and heterogeneity may create business opportunities, they may also create incompatibility and the absence of leadership needed to promote communication can constrain integration. Thirdly, the Cold War structure still endures in the Korean Peninsula. This makes economic exchange vulnerable to the political environment. As Figure 3.1 shows, the ROK’s relationship with other countries has undergone a metamorphosis. Since the early 1990s, the inner star-shaped relations have been established economically if not politically. However, the surrounding pentagon is still new and almost nonexistent except for the growing tie between China and the ROK. This means that, unlike in other regional economies in Asia, the market mechanism has not reached a sufficient level of penetration and a certain amount of institutional effort is needed to thoroughly break the ice. Unless the DPRK makes a more substantial commitment to open-door policies, multilateral projects such as the Tumen River Area Development Project (TRADP), coordinated by the United Nations Development Program (UNDP), may be the only option to keep the DPRK out of isolation.

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61

Thus, in order to analyze the present structure, examine the background and project the future course of economic integration, our discussion will be confined to the narrow geographic definition given above. The United States will be excluded, except in the case of multilateral cooperation. First, this chapter will analyze the background of economic integration by exploring the initiatives of the key members and also the TRADP, the symbol of this region’s cooperation. Secondly, in order to grasp the total picture, the fundamental relationships which are expected to be the driving force in this zone— Japan–ROK and Japan–China—will be analyzed in a regional context. Thirdly, based on the analysis of the present structure, business potential and prospects for integration will be reconsidered. The structure of the Northeast Asian Economic Zone The structure of economic exchange within this zone can be divided into two groups. The first group involves relatively new ties which have emerged since the end of the Cold War. The most outstanding of these is the initiative taken by the ROK which, during the Cold War, had been isolated from China, the DPRK and Russia. It includes initiatives by the DPRK and Mongolia to seek economic development independent of their former socialist alliances and also initiatives by the local governments both in China and Japan. The other group encompasses the traditional links that have been in existence. This group of relationships is led by the Japan–ROK and the Japan–China relationships. There are other conventional relations like Japan–Russia and China–DPRK but in terms of total trade volume, economic growth rate and dynamism of structural change, they lag far behind and may not contribute much to the formation of a regional economic zone. The initiative by the Republic of Korea: the ‘Nordpolitik’ and its achievement In preparation for the Seoul Olympics in 1988, the ROK, under the leadership of President Ro, undertook the so-called ‘Nordpolitik’ strategic approach towards the Northeast Asian countries. This policy had two goals. The first was to politically establish diplomatic relations with China and Russia in order to contain the DPRK. The second was to economically bridge the widening gap in levels of economic development between the ROK and DPRK to prevent a sudden collapse of the North Korean regime and to alleviate the cost

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of unification. The ROK initiated this strategy mainly by promoting the following economic policies. First, domestic laws which had prohibited ROK citizens from contacting Chinese, Russian and other people in communist countries were repealed and overseas Koreans were allowed to approach North Koreans. Secondly, economic laws, including trade laws, were revised to guarantee most-favoured nation (MFN) status to China, Russia and the DPRK. Investment laws were also revised to permit both incoming and outgoing investment and security laws were revised in relation to these modifications. Thirdly, investment was made in infrastructure such as transportation, communications and bank correspondence networks with socialist countries. The ROK even constructed a special industrial park in the Yellow Sea region to target exports to China. Backed by these promotion policies, the ROK’s business with these countries has expanded rapidly and has exceeded the speed of Japan, which had been fully occupied with an intensive globalization program in Southeast Asia and thus has been reluctant to act positively in this region. Relations with China, the top priority of the ROK’s Nordpolitik, were stunted by the Tiananmen episode of 1989, but the sudden, drastic change in Russian politics turned out to be a windfall with the realization of ties with Russia early in 1990. Thereafter, the ROK proceeded to concentrate its efforts on establishing diplomatic relations with China which finally came to fruition in 1992. Table 3.1 shows the changes in the ROK’s trade with these two countries. After the Nordpolitik was launched, trade with China increased drastically in 1988 and has witnessed a further boom since 1991. The ROK had a trade deficit against China until 1992, but the shift of export structure towards heavy and chemical goods has shifted the trade balance to a surplus. In contrast to its China trade, ROK trade with Russia has grown very slowly and has been more volatile. The only reason for the increase in exports to Russia in the early 1990s was the ROK’s decision to extend economic assistance to Russia. However, substantial progress has never been made due to the dissolution of the Soviet Union and the political turmoil that has followed. With its political goal achieved, the focus of the Nordpolitik has changed considerably since the early 1990s. Moreover, the domestic business environment of the ROK has also changed drastically and there has been a greater need to expand business in this region for the following reasons.

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Table 3.1 The Republic of Korea’s trade with China and Russia (US$mil.) China

Russia

Year Exports Share% Imports Share% Balance Exports Share% Imports Share% Balance 1981 5 1982 6 1983 5 1984 17 1985 40 1986 123 1987 211 1988 372 1989 437 1990 585 1991 1003 1992 2654 1993 5151 1994 6203 1995 9144 1996 11378

0.0 0.0 0.0 0.1 0.1 0.4 0.4 0.6 0.7 0.9 1.4 3.5 6.3 6.5 7.3 8.8

70 91 69 205 478 621 866 1387 1705 2268 3441 3725 3929 5463 7401 8539

0.3 0.4 0.3 0.7 1.5 2.0 2.1 2.7 2.8 3.2 4.2 4.6 4.7 5.3 5.5 5.7

–65 –85 –64 –188 –438 –498 –655 –1015 –1268 –1683 –2438 –1071 1222 740 1743 2839

1 1 1 3 16 12 17 26 208 519 625 365 601 962 1416 1968

0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.3 0.8 0.9 0.5 0.7 1.0 0.1 1.5

10 16 24 41 42 68 133 178 392 370 577 495 974 1230 1893 1810

0.0 0.1 0.1 0.1 0.1 0.2 0.3 0.3 0.6 0.5 0.7 0.6 0.1 1.2 1.4 1.2

–9 –15 –23 –38 –26 –56 –116 –152 –184 149 48 –130 –373 –268 –477 158

Note: Russia denotes the former USSR till 1991. Source: Korean Foreign Trade Association, Major Statistics of Korean Economy, various years.

First, currency appreciation and a severe trade dispute forced the ROK to end its heavy dependence on export-oriented growth and to face the need to diversify from the US market. Secondly, widespread labour disputes and wage hikes during the late 1980s triggered industrial restructuring including the relocation of labor-intensive industries to overseas facilities, and increased the need for cheaper raw materials to reduce costs. China, which possesses both human and natural resources, is considered to be an ideal cooperation partner for the ROK. Thirdly, since the 1980s, the ROK has tried to narrow its technology gap with the Western world. This has prompted it to diversify its sources to include countries other than its major Western partners. The basic technologies developed by heavy research and development (R&D) investment in the defence industries of the former socialist countries, especially Russia, seemed to be an attractive alternative for the ROK. On the other hand, China and Russia have every reason for increasing economic cooperation with other Asian economies. Since 1992, China has started to accelerate its growth by giving more autonomy to local governments. Newly opened regions have been vigorously soliciting foreign investment, including investment from the ROK, to satisfy their huge demand. After the tie with the ROK was established, Russia, in the course of economic reform, demanded that its crude oil trade with the DPRK be settled with hard currency Despite the risk that economic opening may jeopardize the monolithic stability

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Table 3.2 Direct investment by Japan and the Republic of Korea (US$mil.) Japan China Russia Cases Amount Cases Amount 1987 102 1226 1988 171 296 1989 126 438 1990 165 349 1991 246 579 1992 490 1070 1993 700 1691 1994 636 2561 1995 770 3479 1996 365 2438 Total 4066 15887

1 8 12 15 18 NA NA 5 3 6 64

1 9 19 25 51 NA NA 20 25 17 133

ROK ROK China Russia Cases Amount Cases Amount Cases Amount 166 153 81 54 48 28 34 27 25 33 2042

647 483 606 284 260 225 246 420 373 403 8954

1 5 17 38 112 369 629 836 729 703 2897

6 5 14 54 85 222 622 631 818 812 2673

0 0 2 3 10 13 14 22 35 26 112

0 0 1 9 11 8 18 83 89 116 328

Note: 1 Japan’s figures are fiscal year (April–March) based. 2 Japan’s figures are report based, and the ROK’s figures are investment based. 3 ‘Total’ means the accumulated number of cases and amounts since March 1951 to March 1997 in Japan and the total investment of the ROK from 1968 to the end of 1996. 4 Japanese statistics have changed to appear only in Yen terms since the fiscal year of 1995. Therefore, figures since 1995 and ‘Total’ are calculated at 1$=¥116 basis. 5 Japanese figures for Russia account only C.I.S. since 1994; 1992 and 1993 figures are statistically unavailable. Figures until 1991 deal with only the former Soviet Union. Source: For Japan, the Ministry of Finance; for the ROK, the Bank of Korea.

of its dictatorial regime, this forced the DPRK to reluctantly open its economy. Table 3.2 compares Japan’s and the ROK’s direct investment in this region. The ROK’s investment in China has increased drastically since official ties was established and China’s share of the ROK’s cumulative foreign investment has been as large as 43.5 per cent in terms of the number of cases and 19.4 per cent in terms of value at the end of 1996. Taking it accounts that the ROK has been increasing investment even to Japan recently, ROK’s dependence on this region is much heavier than that of its giant rival Japan. As shown in Table 3.3, in terms of China the geographical pattern of investment differs greatly from region to region. While Japanese investment in China is dispersed around cities in coastal areas with a relatively heavy level of concentration (32.2 per cent) in the Shanghai district, 65.9 per cent of the ROK’s projects are concentrated in Shandong province as well as in the three Northeast provinces of Liaoling, Jilin, and Heilongjiang. This reflects the fact that many ROK companies are investing through the network of two million Korean–Chinese who reside in these provinces. In terms of business type, 62.0 per cent of Japan’s and 86.4 percent of the ROK’s total investment in China has been made in manufacturing. In the case of the ROK, 29.1 per cent is in textiles

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Table 3.3 Japan and the Republic of Korea’s investment structure in China by region and industry (% share by cases) Regions

Japan

ROK

Industries

Japan

ROK

Shandong Bohai Beijing Tianjin Heibei Northeast Liaoning Jilin Heilongjiang South Guangdong Shanghai Others

9.0 19.4 9.0 5.8 1.7 20.5 15.3 2.8 3.8 7.7 3.2 32.2 11.2

26.3 20.0 7.0 10.2 2.8 39.6 21.5 11.3 6.7 5.4 3.0 2.5 6.8

Total

100

100

Agriculture/fishery Mining Manufacturing Food and drinks Textile/Miscellaneous Wood and paper Chemical Steel metal Machinery Others Service Construction Transportation Commerce Financial service Others

1.2 0.4 62.0 3.6 10.4 1.0 3.3 4.9 29.0 9.9 15.7 1.2 1.2 4.1 4.2 10.0

1.5 0.6 86.4 6.6 29.1 3.7 9.3 3.0 15.4 15.6 11.5 0.5 0.9 1.6 0.2 8.3

100

100

Total

Notes: 1 Covered periods are as follows. By regions: Japan’s figures are between 1984–93, and the ROK’s are between 1958–Nov. 1994. By industries: Japan’s figures are between 1926–Sept. 1995, and the ROK’s are between 1958–94. 2 All figures are calculated by cases, not by invested amount. 3 Figures by region are all commitment based. 4 Figures by industry are all on a reported basis, not an invested basis. Sources: For regions, Japan’s figures were calculated by summing up the number of joint ventures listed in China International Economics and Trade Yearbook, various issues. The ROK’s figures were announced by the Bank of Korea. For industries, Japan’s figures were from the Ministry of Finance, and the ROK’s figures were from the Economic Planning Board.

and garments, whereas Japan only has 10.4 per cent in textiles but has 29.0 per cent in machinery. This may imply that the ROK’s investment tends to be more labour-intensive, and thus regions with an abundant labour force favour investment from the ROK rather than from Japan. In line with the pattern of capital flows, ROK–China trade is one of the fastest-growing relationships in this region but the ROK– Russia relationship remains stagnant, as indicated by Table 3.4. Textiles used to be a major part of the ROK’s exports to China but its share has declined as imports of textiles have risen. While the ROK has recently concentrated on exporting woven fabrics, China’s exports of apparel and textile products to the ROK are increasing rapidly, leading the way to a rising level of intra-industry trade. Instead, the main focus of the ROK’s exports has shifted to capitalintensive products such as machinery, plastic and rubber. While the share of general machinery has declined, ROK exports to Russia have concentrated on consumer goods, especially electric products and

Table 3.4 The Republic of Korea’s trade with China and Russia (US$mil.) EXPORTS

Primary products Mineral products Chemicals (Organic chemicals) (Plastic and Rubber) Textile (Woven fabric) (Textile products) Metal products (Steel products) Machinery (Electronics) (General) (Transportation) Miscellaneous Others Total

1990 share (%)

China 1992

13 51 102 80 22 171 69 6 89 81 135 98 29 NA 8 16 585

16 182 675 496 179 458 258 30 858 797 442 209 185 38 48 -25 2654

2.2 8.7 17.4 13.7 3.8 29.2 11.8 1.0 15.2 13.8 23.1 16.8 5.0 NA 1.4 2.7 100

share (%)

1995

share (%)

0.6 6.9 19.6 18.7 6.7 17.3 9.7 3 32.3 30.0 16.7 7.9 7 1.4 1.8 1.8 100

123 482 2104 780 1324 1864 426 58 970 742 2074 822 998 255 129 1398 9144

1.3 5.3 23.0 8.5 14.5 20.4 4.7 0.6 10.6 8.1 22.7 9.0 10.9 2.8 1.4 15.3 100

share (%)

1995

share (%)

33.3 30.9 13.9 15.2 2.7

602 593 1056 555 273

8.1 8.0 14.3 7.5 3.7

1990 2 1 21 3 1 80 13 51 35 29 378 155 209 14 NA 2 519

share (%) 0.4 0.1 4.0 0.6 0.2 15.4 2.5 9.8 6.7 5.6 72.8 29.9 40.3 2.7 NA 0.4 100

Russia* 1992 share (%) 7 10 32 22 5 109 24 40 7 6 204 98 79 27 NA 0 369

1.9 2.7 8.7 6.0 1.4 29.5 6.5 10.8 1.9 1.6 55.3 26.6 21.4 7.3 NA 0 100

1995 149 63 9 2 18 123 6 88 26 5 867 671 161 35 95 85 1416

share (%) 10.5 4.4 0.6 0.1 1.3 8.7 0.4 6.2 1.8 0.4 61.2 47.4 11.4 2.5 6.7 6.0 100

IMPORTS

Primary products (Agro-based) Mineral products Chemicals (Organic chemicals)

1990 share (%)

China 1992

600 553 344 521 154

1239 1152 519 567 102

26.5 24.4 15.2 23.0 6.8

1990 85 19 65 67 16

share (%) 23.0 5.1 17.6 18.1 4.3

Russia* 1992 share (%) 158 41 47 100 22

31.9 8.3 9.5 20.2 4.4

1995 228 204 96 160 97

share (%) 12.0 10.8 5.1 8.5 5.1

IMPORTS (continued) 1990 share (%) Textile, paper (Thread) (Woven fabrics) (Textile products) Metal products (Steel products) Machinery (Electronics) (General) Miscellaneous Others Total

469 73 377 18 239 118 52 21 31 43 0 2268

20.7 3.2 16.6 0.8 10.5 5.2 2.3 0.9 1.4 1.9 0.0 100.0

China 1992

share (%)

1995

share (%)

813 138 573 102 272 209 166 33 133 111 38 3725

21.8 3.7 15.4 2.7 7.3 5.6 4.5 0.9 3.6 3.0 1.0 100.0

1848 1369 47 549 1587 1321 774 599 175 135 844 7401

25.0 18.5 0.6 7.4 21.4 17.8 10.5 8.1 2.4 1.8 11.4 100.0

Note: Primary products includes agro-based products. Russia* denotes the USSR in 1990 Source: Trade Statistics Yearbook.

1990

share (%)

11 4 6 0 132 92 9 0 9 1 0 370

3.0 1.1 1.6 0.1 35.7 24.9 2.4 0.0 2.4 0.2 0.1 100.0

Russia* 1992 share (%) 8 4 32 4 175 104 7 2 5 1 -0 495

1.6 0.8 6.5 0.8 35.4 21.0 1.3 0.3 1.0 0.1 0.0 100.0

1995 191 59 0 0 977 616 20 4 16 1 221 1893

share (%) 10.1 3.1 0.0 0.0 51.6 32.5 1.1 0.2 0.8 0.0 11.7 100.0

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textiles. Imports from Russia have been dominated by metal products (including scrapped steel), primary products and other materials. Unlike trade with China, intra-industry trade has remained minimal. As a part of the Nordpolitik policy, the ROK commenced indirect trade with the DPRK in late 1988. With the opening of diplomatic ties with Russia and China, transactions began in the form of primitive barter as well as triangle trade. Since the 1993 inauguration of Kim Yong-Sam as the ROK’s first civilian president, the ROK’s stance toward business exchange with the DPRK has become more positive. Business transactions have even expanded into a more complicated division of labour which includes direct investment into the DPRK. In this inter-Korea trade, the major ROK products are fabrics, polyethylene, rice, and sugar. The major products from the DPRK are apparel, non-ferrous metals, steel, zinc, gold, marine products, vegetables, food, and even human hair. The apparel business usually takes the form of outward processing where the ROK supplies all the necessary materials for production and profits from the lower manufacturing costs in the DPRK. In addition to the Chongjin and Rajin Free Economic and Trade Zone near the Tumen River, the DPRK is reported to be preparing other industrial estates exclusively for ROK investment. In response to this action, major business groups in the ROK have already announced various projects, ranging from the production of labourintensive products (fishery, food processing, apparel, shoes, construction materials, toys and musical instruments) to some capital-intensive products (cement, steel pipe, glass). According to a report published by the semi-official Korea Trade Promotion Corporation (KOTRA)1, economic exchange is shifting from the stage of mere processing to the level of equipment investment. The next stage is supposed to be joint development of mineral resources, agricultural products, property and tourism. The report selected the Chongjin area as the initial region for development with special emphasis being placed on its potential in mineral resource development. The complementary structure and the merit of this inter-Korea cooperation is obvious in that the ROK has certain technology and capital and the DPRK is richly endowed with a low-wage labour force and abundant natural resources.2 Besides economic gains, such a business exchange may promote a mutual understanding similar to that experienced by China and Taiwan or the former East and West Germany. However, the political wall remains high in the Korean Peninsula. This is indicated by the fact that the DPRK strongly resisted the conditions for the stationing of ROK engineers at the Korea Energy Development Organization (KEDO)-sponsored nuclear power plant site. It will be difficult to promote business expansion to a substantial level without any personnel exchange. Though the

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Taiwanese and Chinese authorities have compromised to solve their similar problem by using the euphemistic excuse of ‘personal trip to see relatives’ to ensure that business and trade proceed despite political differences, it is not certain whether the DPRK technocrats will be able to persuade the North Korean military and the conservatives to follow this path. The DPRK has placed a higher priority on developing the RajinSonbong area than TRADP and has declared that even ROK investment will be welcomed in the area, under the same conditions as that of other foreign countries (including visa waiving). But so far, policy implementation has lagged far behind the policy itself. The ruling regime’s fear of ‘spiritual contamination’ by capitalism and the political risk involved in forging economic links with the ROK have frequently stood in the way of progress. The inconsistency of the DPRK does not only affect the ROK. With the announcement of its open-door policy, China prepared to trade with Taiwan using Hong Kong Chinese as go-betweens. Some commentators expect a similar role to be played by the JapaneseKorean. However, their position is complicated, not only in Japan where they have limited communication with big business, but also, or maybe more so, in both the ROK and the DPRK. It is reported that Japan has about 140 cases of investment in the DPRK, mostly run by Japanese-Korean, but very few of these have been successful. Even Japanese-Korean have suffered from various business troubles which stem from a lack of understanding of the capitalist system and of basic business concepts such as contracts. The issue of whether mutual trust should come first, or whether business will create mutual trust, is similar to the problems surrounding China–Taiwan relations but is even more difficult for the ROK and the DPRK to solve. Moreover, since rice assistance was extended to the DPRK in 1995, North–South relations have been further complicated. Suspicion has been rising in the ROK over the possibility of a Japan–DPRK tie which excludes the ROK and could lead to Japan’s dominance of the DPRK market. Regional governments’ initiatives in China and Japan: booming border trade Though the magnitude has been small compared with the emergence of the ROK economy in this region, both China and Japan have been making an effort to stimulate their local economies through border and regional trade. Following paramount leader Deng’s trip to the south in 1992, the Chinese central government launched a policy to promote ‘coastal,

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riverbank, and border trade’, and called for development of inland regions via self-help. This was an authorization of what had already happened to border trade. According to the estimate by Han (1993), all of China’s border trade with Russia (mainly through Jilin and Heilongjiang), countries in central Asia (Xinjiang Uygur Autonomous Region), the DPRK (Jilin and Liaoning), Mongolia (Inner Mongolia and Gansu), Pakistan, Nepal (Tibet Autonomous Region), Myanmar, Laos and Vietnam (Yunnan) had reached 460 million yuan in 1991, more than five times the level of 1987 trade. Though the border trade consists of only 0.6 per cent of China’s total trade, the rapid expansion has had an impact on each small economy in the inland region. Russia, with which China has the longest border, and Myanmar where Yunnan province has strong traditional ties, are two outstanding counterparts. Since Myanmar is more closely linked with the Indochina economic zones which centre around Thailand, Russia– China trade has been increasing far more rapidly than that of Myanmar–China. Led by Heilongjiang, Jilin, and Inner Mongolia, border trade with Russia has been expanding (see Table 3.5). As for traded products, China exports mainly consumer goods, including textile goods, and imports less processed primary goods such as agricultural goods or other natural resources. Since the main industries in the northeast provinces are capital-intensive industries, not consumer industries like textiles, this may indicate that China has already established a domestic distribution linkage. For example, textile products coming from southern China are traded at the northern border. However, a national level counterpart to this kind of network is lacking. There is a strong incentive for the local governments in China to engage in border trade. Until 1988, there was strict central control over the use of foreign currency for imports. However, since the border trade was mostly carried out through barter, it was exempted from this control and local governments could use the imported materials freely for regional production and consumption. Even if the trade volume itself is small and business chances are limited by primitive barter, participants have been able to realize good profits from transferring imported products into other regions on demand. An important point here is that the prices of re-exported products and imported products have been excluded from planned prices in China. Moreover, since participation in border trade is permitted among only regional enterprises, the cost, as well as the profit, is totally integrated into the regional budget. In Japan as well as in China, local governments have taken the initiative to promote economic exchange within this region. Prefectures on the Japan Sea coast such as Niigata, Toyama, Kanazawa and Fukui have been promoting an idea known as the Japan Sea Economic

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Table 3.5 China’s border trade in Northeast Asia (US$mil.) Area/destination Jilin (Exports) (Imports) Heilongjian (Exports) (Imports) Inner Mongolia (Exports) (Imports)

1989 1992 1994 Russia 158 9

share (%)

17 147

313 243

15.5 15.3

365 840 147 NA Russia

753 NA

150 249

107 52

212 197

1989 1992 1994 DPRK 35 332

share (%)

112 122

253 202

12.5 12.7

41 NA

56 48 NA NA Mongolia

42 NA

2.3 NA

25.1 51.7

6 6

27 32

4.5 6.9

24 24

Note: Major traded items are as follows: Trading partners Exports Imports Heilongjian–Russia Beef, canned foods, jars, textiles Automobiles, refrigerators, fertilizer Jilin-DPRK Plant oil, animal feed, textiles Fresh fish, lumber, scrapped steel Inner Mongolia-Mongolia Textiles, agricultural tools Used tyres, scrapped steel, lumber Source: China Yearbook on External Economy and Trade, various issues, and Han Hong-Xi, ‘The Present State and the Role of the Border Trade in China’, Ajia Keizai (in Japanese) vol.34, no.7, July 1993, pp. 69–89.

Zone. Compared with the main industrial areas of Tokyo, Nagoya, and Osaka, these prefectures are more closely linked to the other parts of the region through trade, backed by direct air flights and shipping lanes. At the same time, their economies have been in the vicious cycle of shrinking population and declining industries. As with the northeast provinces in China, each prefecture has been dependent on regional trade. For instance, in Niigata, which has six NEA sister cities (Primorskii, Khabarovsk, Irkutsk, Heilongjian, Pyongyang and Seoul), more than 80 per cent of total exports and nearly 20 per cent of imports have been within this region. The other three prefectures have similar figures. Therefore, to ‘internationalize’ and revitalize their economies, these prefectures have been trying to grasp new business opportunities in this region. In cooperation with the private sector, Niigata has been leading these efforts to establish a research institute for regional study and an investment company in Russia. It has also announced a comprehensive plan to improve its infrastructure, including an expansion of its international airport and establishment of an organization for marine resource development, technology transfer and market research. At the same time, the other three prefectures have been cooperating to promote business by the creation of an international distribution system, promotion of direct investment and joint R&D activities, and promotion of small, local companies, tourism and property development.

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However, in terms of trade volume within this region, the share of the Japan Sea coastal area is very small, consisting merely of 1–2 per cent of Japan’s total trade. While trade has been increasing with the ROK and China, it has been stagnant with Russia and the DPRK and for the Japanese prefectures concerned, the domestic economic forces have a more significant impact than this international trade. Therefore, the ultimate aim of the Japan Sea Economic Zone concept is to create a gateway or a headquarters for this region, to establish better links with the major industrial areas of Japan and to become a hub for Northeast Asian infrastructure investment. The reason most programs have been stressing the importance of tourism should be understood within this context. Thus, if members are less developed parts of a country, yet make a positive effort to substantially participate in the regional economy, they tend to enforce the links with the more advanced regions in their own country and then, ironically, the image of ‘regional economic zone’ tends to be less distinct. This structure is typical for China’s three provinces, but since Japan is more homogeneous and has less central control than China, the benefit of ‘regional business exchange’ such as trade or the transfer of technology that is unique to a specific region may be smaller. A multinational initiative: the Tumen River Area Development Program (TRADP) Selected as a top priority by the UNDP in 1991, the current symbol of the Northeast Economic Zone is the Tumen River Area Development Program (TRADP). Within the TRADP, there are four principal sub-projects: coal energy and air pollution, agricultural development, resource recycling, and new energy sources. This project was first proposed by the Jilin province, which was trying to secure a route to the Japan Sea. China’s border ends only 15 kilometres from the coast and to promote exports it is imperative for Jilin to have access to a sea port. China’s original idea was to divide the project into the following three phases. The first phase was to establish the small zone within the triangle that joins Sonbong (DPRK), Hunchun (China), and Posyet (Russia) as a free economic zone. The second phase was to develop a so-called greater economic zone within the Chongjin (DPRK), Yanji (China), and Vladivostok (Russian) triangle. The final phase was to include all the northeast provinces in China, the Russian Far East, and even the DPRK provinces of Jagangdong and Hamkyung Pukdo in a regional economic free zone (ses Figure 3.2).

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Figure 3.2 The area for Tumen River Area Development Program

This project involves large-scale infrastructure investment such as a railroad (from Tumen to Hunchun), port facilities, airports, communications networks, and the establishment and construction of industrial estates. China also proposed free economic zones that could realize a free flow of capital, labour and merchandise given the cooperation of the three participants in the project. This proposal has been carefully studied and opportunities for practical discussion have been organized by the UNDP. In May 1995, the UNDP was successful in helping the originally concerned three parties plus Mongolia and the ROK to reach an agreement to establish a coordinating committee for the development project. Led by China, most countries in this region have been positive from the beginning of this project. However, as is often the case with international projects, each country has had different interests. The DPRK signed the agreement for the TRADP in 1995 and recently admitted the importance of linking the TRADP and the Rajin-Sonbong area which it has been developing independently. However, the DPRK still puts more emphasis on the latter and is trying to develop the two ports as regional hub ports for the following reasons. First, for the DPRK, where the preservation of the regime has been of paramount importance since Kim Il–Sung’s death in 1994, the Rajin-

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Songbong project is the perfect avenue to open its doors while still maintaining control and avoiding international pressure or political influence. Secondly, since the economy has been in a state of crisis since 1992, it would have been difficult to cooperate with the international project without losing national pride. The DPRK has consistently invited the TRADP members to use the two ports, claiming that the Russian ports freeze during the winter while Rajin and Songbong do not, and that Songbong is more conveniently located, halving the distance between Hunchun and Japan. The Russian far east has also shown interest in the TRADP project, but not much progress has been made due to the difficulty in getting attention, if not commitment, from Moscow. For instance, in 1991, ‘the new concept to promote social and economic development in the far east’ was announced with some specific measures including improved foreign investment laws and the establishment of a development bank in the region. However, before implementation, the ‘statement on state enterprises’ rights’ was announced and virtually abolished the concept by reviving the central government’s control of the state enterprises’ activities in the far east. Political instability apart, Russia had already announced its own ideas for free economic zones around the far eastern cities of Nakhodka and Vladivostok. Like the DPRK, it has tried to promote its own plan first. The specific plan was prepared by UNDP, aiming at import substitution (turning from textile products to machinery, automobile and other consumer products) and export promotion (processed materials and assembled products like electronics). Since the Russian far east is lacking in the necessary labour force for industrialization, these plans are preconditioned on international cooperation including the free flow of labour. However, for the central government, this ‘outward-looking policy’ of seeking linkages with regional economies is seen as one that will weaken the domestic linkage and could lead the way to political independence. Thus, this plan has not gained political support. This is exactly the opposite situation to that in China and unless the Russian government regains political stability and confidence, it is unlikely that Russia will promote local autonomy under any kind of plan, even with international coordination. Unlike the DPRK or Russia, Mongolia has no independent proposal of its own and is receptive to each plan that has been proposed. Though Mongolia has announced a plan to open Dornot and other areas in the east, none of these free economic zones gives Mongolia access to the sea and the concept is, at this stage, experimental.3 This makes links with the surrounding countries indispensable. For this reason, Mongolia has been discussing not only a railroad from the Tumen River basin to Ulan Bator, but also the

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extension of the railroad into Central Asia, making Mongolia a crucial link between Asia and Europe. The railroad now under construction in Inner Mongolia has sufficient potential to be extended to Ulan Bator. Despite each member’s different position, UNDP has been a patient coordinator for TRADP and in the October 1992 meeting, the above four members and the ROK agreed to four conditions for the economic zone: i

Lease of land by China, Russia and the DPRK (100 sq. km each) based on the investment laws of each country; ii Maintenance of sovereignty for the land; iii International management for the area; and iv Maximum effort to make the land an attractive investment area. In 1993 Jilin reached an agreement with Russia to lease the port of Zarubino, and to build a railroad connecting it with Hunchun. This joint project has promoted the gradual, realistic approach that member countries can use to implement the related plans within their capabilities as was agreed upon in 1995. However, in addition to this progress, there is much to be discussed regarding the second phase of the TRADP after the 1995 agreement. First, there has a been a lack of coordination between the local and central governments of the parties involved. In comparison with other regions in Asia, the essential difference is that all the participants, except the ROK, are the most under-developed parts of their countries. This means that, as Russia’s case shows, international management in the planned area tends to be influenced by, and fluctuates with, the level of discord between the local and central governments. Even in China, which seems to be far better off in this respect, the TRADP has never been taken up to the Long-Term National Plan level. Japan’s interest in the project has cooled because of a sluggish domestic economy, but the original interest of the local governments had been in infrastructure inside Japan which could link their economies with more dynamic areas. Secondly, the financial feasibility of the project is still uncertain. No reliable cost and benefit analysis has been done regarding the strategic value of this area in terms of transportation links, resource development, and employment opportunities. Major projects under consideration need support from international financial organizations such as the World Bank and the Asian Development bank (ADB). However, as long as the Cold War structure remains in the Korean Peninsula, it will not be easy to acquire this assistance. Moreover, Japan, the most likely supporter in the region, does not have a

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flexible assistance scheme for joint projects undertaken by multiple recipients, nor for officially unrecognized countries. Thirdly, there is a lack of a real project coordinator. In other Asian economic zones, traditional ties are emphasized, but deeply rooted distrust among participating countries still exists in this region. This distrust should not be overlooked because there is a need for governmental cooperation based on mutual trust so that poor infrastructure can be overcome. At an official level, there is no country that can play the leader’s role and organize the project within this region. While Japan is in the best economic position to take on the mantle of leadership, it is cautious so as not to provide the impression that it is trying to create another version of the economic bloc which was proposed before World War II. China has been aggressive but its relations with both neighbouring Mongolia and the DPRK are also complicated. Russia’s past relationship with the West also echoes this weakness in political ties. The ROK’s effort to take the initiative has been limited by the presence of the DPRK which has always tried to bypass her to negotiate directly with the US and Japan. The DPRK has already had various commercial troubles with all of the members of the TRADP and has virtually no hope of acquiring the reparations from Japan which would help realize its epoch-making economic reforms. Therefore, although the potential benefits are relatively clear, this lack of a powerful coordinator may make it difficult to realize the second phase of the TRADP. As long as China does not exclude or irritate the US, which has shown an interest in this project from its early stages, China’s flexible bilateral and multilateral approach is expected to play the greatest role. Major bilateral links Subregional trade in Northeast Asia, as expressed in the surrounding pentagon of Figure 3.1, has rapidly emerged in the post-Cold War ear. However, in terms of both scale and scope, most of the emerging bilateral links have remained weak. As shown in the trade matrix of this region, intra-regional trade has been dominated by bilateral links between Japan–ROK and Japan–China, followed by China–Russia, ROK–China, and Russia– Japan (Table 3.6). While both the DPRK and Mongolia exhibit an extremely high level of dependence on this region, Japan and China’s interest has stagnated. The ROK’s share had increased until 1990 but Russia’s has stayed negligible. The DPRK’s share dropped drastically in 1994, reflecting the reduction in trade with Russia as a transition was made toward hard currency transactions.

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Table 3.6 Change of trade flow in exports in Northeast Asia (US$ mil.) 1985

Total

Japan ROK China USSR DPRK Mongolia 1990

Total

Japan ROK China USSR DPRK Mongolia 1994

287 664 65 027 62 876 109 172 1857 349 Total

Japan ROK China F.USSR** DPRK Mongolia Note:

177 189 30 972 27 329 87 281 1130 553

397 005 96 040 120 822 79 826 1703 324

NEA Share (%)

Japan

ROK

12.9 15.6 30.8 3.6 78.3 78.5

4144 6534 1438 177 6

7159 2268 NA NA NA

NEA Share (%)

Japan

ROK

22 770 4827 8419 3149 885 434

26 397 14 748 12 081 7211 1456 284

9.2 22.7 19.2 6.6 78.4 81.2

NEA Share (%) 44 606 20 728 28 256 6811 638 255

11.2 21.6 23.4 8.5 37.5 78.7

- 17 499 12 638 9210 433 3370 370 271 20 4 NA Japan

ROK

- 24 361 13 523 21 490 4376 2312 477 297 160 42 19

China USSR

DPRK

Mongolia

2772 NA 1037 485 426

249 NA 239 787 NA

2 NA 5 768 NA -

China USSR

DPRK

Mongolia

176 5 362 1585 NA

14 1 28 379 NA -

12 590 683 924 23 2

6145 1585 1886 118 6

2563 519 2048 1047 274

China F.USSR* DPRK Mongolia 18 687 6203 3828 181 63

1362 982 1922 NA 131

171 20 425 122 NA

25 NA 43 141 NA -

Total denotes total exports of the countries concerned and share denotes NEA market share against the total exports.

Sources: 1 1985 figures are based on Kenichi Imai, ‘The Trade Structure in Northeast Asia’, in Kuribayashi (1993). 2 1990 figures are also based on Imai, but partly corrected by IMF, Direction of Trade Yearbook 1992, and 1994 figures are all from Direction of Trade (DOT) Yearbook 1995. F.USSR* in 1995 denotes the accumulated figures of Russia and other major export counterparts of NEA which became independent from Russia following the collapse of the USSR, for comparison with 1985 and 1990 figures. F.USSR** denotes Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Tajikistan, Ukraine, Uzbekistan, and Russia, which are only available in the DOT Yearbook. 3 DPRK figures on USSR and the F.USSR are based on the estimation of Japan External Trade Organization (JETRO).

In terms of direct investment, the major trade players also dominate. China receives the major share of foreign investment in Northeast Asia but its overseas investment in the region is relatively small. Russia has invested in Mongolia on a minor scale. The major investment flows are between Japan–ROK and Japan–China, with the ROK–China axis emerging as a third major flow of investment. In this region, Japan and the ROK are the major exporters of capital and technology and are also major markets. China serves as a link between these players and the DPRK and Mongolia by offering business chances such as those symbolized in the Tumen River Development plan. Before discussing this region’s potential, the basic

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roles of members should be identified, noting the dynamic changes that have occurred over the last couple of years. Japan and the ROK: competing and complementing relations Reflecting the level of industrialization and industrial structure, the Japan–ROK relationship is the most mature and substantial in this region, which is apparent when compared with the trade relations between Japan and China (see Table 3.7). In terms of exports, Japan acts as the supplier of capital goods and intermediate products for both countries. However, since the ROK has already completed the import substitution phase in steel, its share has been relatively small when compared with that of China. On the other hand, the share of manufactured goods has been higher for Japanese imports from the ROK than for imports from China, although the gap has been shrinking rapidly. In 1995, manufactured goods made up 83.1 per cent of Japanese imports from the ROK, compared with 77.3 per cent for imports from China. Japan’s exports to the ROK have been dominated by machinery, which accounts for about 60 per cent of the total. On the other hand, in line with the growing importance of the ROK as a major supplier of capital goods, machinery’s share of Japanese imports from the ROK has increased sharply from 15.0 per cent in 1988 to 35.2 per cent in 1995. The maturing relationship between Japan and the ROK has been reinforced by direct investment and technological cooperation. Japan’s direct investment into the ROK ranks only seventh in Asia and was surpassed by Thailand in 1990. While the ROK’s investment law has been one of the most conservative in Asia, the extraordinary wage hikes in the late 1980s greatly discouraged Japanese companies from operating in the ROK. Nevertheless, the relatively small investment position in contrast to the huge trade volume indicates that Korean rather than foreign capital has been playing a greater role in the industrialization process. While Japanese investment has decreased sharply since 1988, the ROK’s technological imports from Japan have consistently increased. They reached a peak of US$398.6 million in 1994, and US$412.3 million in the first seven months of 1995. In 1995, the ROK’s investment in Japan also reached a level of US$120 million, equivalent to 30 per cent of Japan’s investment in the ROK. This horizontal exchange of capital is another sign of a maturing relationship. Another point to note in Table 3.7 is that the ROK market has expanded rapidly. This is partly due to the country’s efforts to open the market to the OECD level, but largely due to the wage hike that stimulated its domestic consumption during this period. Despite the

Table 3.7 Japan’s trade with the Republic of Korea and China (US$mil.) Exports to:

ROK 1988 $

Foodstuffs 28 Textiles 620 Chemical 2039 Non-metallic 347 mineral products Metal goods 2010 Iron & steel 1496 Machinery 9263 General machinery 3947 Electrical machinery 4267 Transportation 547 machinery Precision 502 Others 1135 Total 15 441

1992

share (%)

$

1995

share (%)

$

share (%)

1988 $

1992

share (%)

share (%)

$

share (%)

0.5 4.1 14.5 2.3

229 771 4174 720

0.7 2.5 13.3 2.3

25 587 941 134

0.3 6.2 9.9 1.4

33 1223 1074 172

0.3 10.2 9.0 1.4

94 2369 2039 261

0.4 10.8 9.3 1.2

13.0 9.7 60.0 25.6 27.6 3.5

1866 1154 10 438 4876 4452 525

10.5 6.5 58.7 27.4 25.1 3.0

3441 2352 19 063 8507 8103 794

11.0 7.5 60.9 27.2 25.9 2.5

2736 2471 4564 1754 2155 525

28.9 26.1 48.2 18.5 22.7 5.5

1735 1472 6613 2865 2413 1163

14.5 12.3 55.3 24.0 20.2 9.7

3107 2351 12 244 6060 4810 942

14.2 10.7 55.8 27.6 21.9 4.3

3.2 7.3 100.0

586 1664 17 770

3.3 9.4 100.0

1659 2893 31 291

5.3 9.2 100.0

131 488 9476

1.4 5.2 100.0

172 1100 11 949

1.4 9.2 100.0

432 1817 21 931

2.0 8.3 100.0

1988

1858 251 361 9340

$

96 727 2571 408

ROK

$

1995

0.2 4.0 13.2 2.2

Imports from:

Foodstuffs Raw material Mineral fuel Manufactured goods

China

share (%) 15.7 2.1 3.1 79.1

China 1992

$ 1568 283 538 9188

1995

share (%) 13.5 2.4 4.6 79.4

$

1828 241 844 14 356

share (%) 10.6 1.4 4.9 83.1

1988 $ 1781 1318 2119 4641

1992

share (%) 18.1 13.4 21.5 47.1

$

2787 1074 2286 10 806

1995

share (%) 16.4 6.3 13.5 63.7

$

4708 1364 2097 27 753

share (%) 13.1 3.8 5.8 77.3

Imports from: (cont.)

ROK 1988 $

Chemical Textiles Non-metallic mineral products Metals Iron & steel Machinery Others Total

China 1992

share (%)

$

1995

share (%)

$

1988

share (%)

$

1992

share (%)

1995

$

share (%)

$

share (%)

491 3246

4.2 27.5

595 2748

5.1 23.7

974 2501

5.6 14.5

619 2438

6.3 24.7

703 5887

4.1 34.7

1324 12 355

3.7 34.4

705

6.0

324

2.8

258

1.5

89

0.9

260

1.5

769

2.1

1757 1427 1775 1367 11 811

14.9 12.1 15.0 11.6 100.0

1664 1358 2172 1686 11 577

14.4 11.7 18.8 14.6 100.0

2447 1839 6075 2102 17 269

14.2 10.6 35.2 12.2 100.0

711 446 150 634 9859

7.2 4.5 1.5 6.4 100.0

566 310 1112 2278 16 953

3.3 1.8 6.6 13.4 100.0

2203 1184 5158 5944 35 922

6.1 3.3 14.4 16.5 100.0

Source: Japan External Trade Organization (JETRO)

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1990–92 yen appreciation, Japan increased its export of consumer goods to the ROK to take advantage of the strong demand for highquality product. This indicates that the ROK’s market structure is edging closer to that of Japan, merging into a more homogeneous, almost integrated market that may evolve into a single Japan–ROK market in the future. In this environment, Japan’s investment in the ROK has shifted drastically from manufacturing to the service industry and from an export base using relatively cheap labour to a production site for the local market and/or the Japanese market. The Japan–ROK economic relationship may imply the following future roles and contribution for regional economies. First, as is shown in the trade structure, both countries serve as suppliers of capital and intermediate goods. In some categories such as steel and electronics, the ROK has always trailed Japan but competition is fiercest in the lower end of market products. Thus, China, the DPRK and Mongolia are able to enjoy the advantageous prices which result from Japan and Korea’s competition while also enjoying the division of labour. Japanese investment would contribute to the transfer of high technology and modern management, and in some cases could even provide a Japanese market, while the ROK would contribute to higher employment with its investment in labourintensive industries. The ROK could also transfer the ‘appropriate technologies’ that could easily be absorbed by local partners. Secondly, as markets, both countries traditionally have the same pattern of imports dominated by energy resources and primary goods, including agricultural goods and industrial materials. The increase in the purchasing power of the ROK has led the Japanese and ROK markets to become more closely integrated in this respect. For instance the ROK is the second-largest market for liquid natural gas and high-class coal in East Asia. In textile trade, the ROK’s rapid industrial adjustment has helped it to transform itself into a major importer, presenting China with its domestic market, as Japan did for it in the past. Thirdly, the relationship between the two countries has the potential for highly horizontal relations, including strategic alliances by leading companies, similar to those among European countries. In the early 1990s, Japanese companies, facing the severest depression of the post-war era, started to give up their comprehensive industrial structure and to promote technology export, while at the same time paying more attention to profitability than to market shares. This shift combines well with the ROK’s successful effort to promote technology-intensive industries such as Dynamic Random Access Memory (DRAM) semiconductors. While Japan has started to concentrate more on high value-added and profitable businesses, the ROK has emerged as the world’s largest DRAM manufacturer and is a powerful supplier

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even in the Japanese market. This makes a Japanese–Korean strategic alliance feasible for the first time in history. If Japan is successful in accelerating her globalization and in handling the difficult relations with the ROK, it will contribute greatly to the division of labour within this region and provide for smooth industrial adjustment, which is the key for sustained growth in Asia. Japan and China: the new experiments With the exception of small companies seeking labour and niche business, Japan ceased to actively invest in China only for a short period following the Tiananmen crackdown in 1989. However, since 1992, the investment boom has come back. While the ASEAN countries which had absorbed most of the Japanese investment since the yen appreciation have started to be plagued by rising wages and insufficient infrastructure, China’s accelerated growth has offered new business opportunities. This boom of Japanese investment in China has been led by three industries: textiles, electronics (mostly parts, precision machinery, telecommunication equipment, office machinery and consumer electronics) and miscellaneous light manufacturing such as footwear. These industries were first concentrated in southern areas which were supported by Hong Kong, but they rapidly expanded to all coastal areas. Due to severe competition with ASEAN countries, China’s northeast provinces, with the exception of Dalian, lag in attracting such investment. However, although the accumulated capital is still minimal, a couple of features of Japanese investment are unique to the northeast provinces, indicating that China will play a crucial role in economic integration by offering a number of business opportunities. First, the projects tend to stress cultural links between Japan and China, and so the targeted markets tend to concentrate on Japan or the ROK. This contrasts with the southern provinces which seek an international market. For instance, manufacturing, food processing and other agro-based industries such as the manufacture of disposable chopsticks can target both the domestic market as well as the Japanese and Korean markets. In computer software and data processing, many companies are making use of personnel who are familiar with the Japanese language. This trend may imply that in addition to the natural resources, the importance of which tends to be exaggerated in this region, human resources contributes as an important factor in this zone. Secondly, Japanese capital, in the form of investment by multinational firms, has functioned to connect the ASEAN countries to China, as well as northern China to southern China. On the basis of the relationships formed while doing business in the ASEAN

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countries, some companies prefer to share the business ‘risk’ with overseas Chinese. Japanese companies regard the information and personal network of the overseas Chinese as an important tool and offer capital and technological backup to their businesses in China. As mentioned above, capital flow from overseas Chinese, or from the wealthier south, is indispensable for the northeast provinces in China. Japanese multinational firms have been serving their self-interest by supporting this flow. Thirdly, the industrial structure of Japan and the ROK, which depends on the heavy and chemical industries (HCIs), will have a better division of labour in the northeast provinces of China. In China’s northeast provinces, HCIs consisted of about 70 per cent of total value-added in the manufacturing sector. China’s domestic demand for such intermediate products has been increasing rapidly, indicating greater business potential for HCIs in this region. Though the HCIs are still dominated by inefficient state enterprises of which reform has never been an easy task, this region has the advantage of abundant energy resources, water supply and hinterland markets such as Beijing and Tianjin. If Japan or the ROK can cooperate to reform these enterprises, the experience will greatly benefit Mongolia and the DPRK, which have targeted HCIs on a smaller scale. Development potential Before considering the prospects for the Northeast Asian Economic Zone, ‘the potential’ must be examined. Since this region is still at an early development phase, it is difficult to forecast the future by extrapolating from what is happening in the South China Economic Zone. Natural resources development Like the emphasis that was placed on the ASEAN countries or Latin America in the 1970s, rich natural resources have always been stressed as being the region’s potential source of strength. Russia has the world’s richest deposits of coal, petroleum, natural gas, iron ore and wood, and is second richest in gold, tin, and diamond deposits. Among these natural resources, at least 30 per cent of the coal, 20 per cent of the natural gas, 26 per cent of the wood and 40 per cent of the fishery catch as well as 100 per cent of the diamonds are concentrated in the far east. China possesses the world’s second largest coal deposits, and 40 per cent of China’s petroleum, iron ore, zinc, rare earth and other mining resources are concentrated in the northeast provinces. In addition, the DPRK has coal, iron ore, gold, and rare earth deposits.

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However, while this zone has abundant resources, in many cases their development potential may not be commercially viable. First, severe climate, poor infrastructure, and difficult social conditions may hinder their feasibility. In Russia, under the former socialist regime, development priority was given to mines which were technically easy to excavate and those that were well positioned for transport. Now, as the more difficult ones are being considered for development, costs are increasing appreciably. On the supply side there is a quality problem for some mines. While Russia has coal that is superior in quality, with a lower sulphur content, to coal that is produced in Australia and Indonesia, the production amount is actually limited. China’s coal is inferior in quality, so the country has to depend on imported higher-grade varieties to supply its larger steel mills. On the demand side, advanced countries have been shifting their industrial structure to energy-saving industries and environmental protection is accelerating this trend. For example, attempts have been made to substitute petroleum with other energy sources. According to recent energy consumption forecasts for this region, the Japanese market is huge but will mature and the ROK market will follow suit. With the lower demand in the regional markets, petroleum in the Russian far east will be difficult to develop. Ironically, the only current prospect that will alter this trend will be the emergence of both China and Russia as the chief consumers in this region. For instance, China obtains 75 per cent of its energy from coal, but has ambitious plans to construct nuclear power plants to increase its electricity supply. Russia is also promoting power plants, but its supply is more limited than China’s due to the severe natural conditions. If these two giants are to accelerate their industrialization, the energy market must be tightened to make the costly development of resources viable and the volume of exports will also have to be reduced. Therefore, in contrast to the industrialization experience of Japan and the other NIEs, it may be safe to say here that both these giants will be relatively free from energy constraints in terms of balance of payments. However, they will not be able to indulge or depend on the income from energy exports as Indonesia does. Agro-based industries Besides energy resources, this region has other abundant natural resources. In fact, the outlook of agro-based industries seems to be better than that of energy-resource development. Both Russia and the DPRK possess abundant marine resources and the Jilin province in China has rich agricultural and wood resources. Japan is one of the world’s largest

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markets for marine products, as well as for processed vegetables, vegetable oil, plywood and other wood products. Since Japan is seriously lacking in labour, the increased demand for these consumer goods affects the balance of imports. For instance, Japan’s lumber imports have been stagnant since the early 1990s, whereas imports of plywood and wood chip have been increasing steadily. While China, with the advantage of an abundant labour force, has been responding to this change, Russia has been slow to move. The northeast provinces in China have already succeeded in inviting small-scale investment from Japan to produce furniture, woodware, construction material and paper products. Additionally, the ROK has invested in piano manufacturing facilities. In Russia, some investment has been undertaken to upgrade the processing of wood, but even primitive lumber has had quality control and delivery problems, and more complicated processing seems to be difficult due to the shortage of labour, vintage of machinery, and wood resource locations becoming increasingly further afield. In terms of marine resources, before the promulgation of the investment law in Russia, Japan’s major concern had been securing and increasing its fish-catch quota. Recently, both Japan and the ROK have started to provide technology for fisheries and aquaculture in return for an increased quota and increased exports to Japan. The potential for this agro-based business to grow seems to be greater than for the development of energy resources for the following three reasons. First, agro-based businesses need relatively small investment and require only simple technology, making their launch by local entrepreneurs feasible. Secondly, since it is based on local natural resources, aqua-culture does not require foreign exchange to purchase the necessary materials and is thus free from the risk of regional currency fluctuations. Finally, there are not many competitors in southern China or the ASEAN countries because their marine natural resources are different. These circumstances aside, if this vertical integration is pursued properly, agro-based industries will create employment, which for this region (except for Russia) is at the top of the policy agenda. This region would benefit from the ROK’s investment, which is more vertically integrated than that of Japan. In Russia, for instance, the ROK’s projects range from simple lumber processing to the production of wood chip and finally to furniture assembly. The same is true for China, where pianos are also made. Tourism With its many places of interest and natural beauty, there is great potential for the tourism and service industries in this region. The

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Russian far east has numerous historical cities and the northeast provinces of China and the DPRK are endowed with mountains, rivers and other places of natural beauty. On the demand side, the number of Japanese nationals travelling overseas has been increasing steadily and now exceeds 10 million each year. Nationals from both the ROK and Taiwan are also travelling overseas more often than before. Tourism is one of the fastest and most stable ways of earning foreign currency. Once the necessary facilities such as hotels and other services are in place, and successful promotion is underway, the income from tourism tends to be stable. As with agro-based business, opportunities are available for small, local companies. What is more important, the free flow of tourists will contribute to the promotion of mutual understanding while urging investment for infrastructure to link major cities. In Japanese prefectures, many projects have been equipped with transportation hub facilities between the region and the larger cities. Such development examples will be useful for other parts of this region which have little experience in promoting tourism. Tasks and prospects Despite various efforts to accelerate integration in the region, the development of this economic zone will not be easy as long as the Cold War structure remains. It is not sufficient to just improve the poor infrastructure and allow the private sector to take the initiative. Institutional efforts are still required to promote dialogue and help the diffusion of the market force. First, entrepreneurship should be promoted in local areas by granting greater autonomy to regional governments. While China has been relatively successful in this field, both Russia and the DPRK need to improve their present regimes. However, in both China and Japan, the objectives of individual regional governments are similar. As a result, they often compete rather than cooperate with each other. This is especially evident in the seeking of support from the center. Secondly, there is no core economy in the region to play the role Hong Kong so successfully undertakes in the South China Economic Zone—backing-up business with financial services, information services, high levels of education and health care services. The Tumen River project is one effort to create this type of business centre. Another evolving effort centers on Dalian in China. However, if this scheme tries to strengthen links with southern China, the spillover of economic development will take an intolerably long time to reach the surrounding regions in the northern provinces.

THE NORTHEAST ASIAN ECONOMIC ZONE

87

Thirdly, the region has potential for cooperation based on the homogeneity and heterogeneity of the key players (Japan, the ROK and China). In terms of homogeneity, Japan and the ROK can offer a huge integrated market to the region, and northeast China is expected to follow. In considering technological levels and natural endowment, resource-based products seem to be the base for the first stage. If, at the second stage, its heavy and chemical industries are successfully integrated into this market, the region will be on a smooth track for export-oriented development. In terms of heterogeneity, Japan and the ROK have different levels of technology in HCIs and, if they are combined properly, this region will be able to emerge as a strong HCI region having a clear division of labour with southern China and the ASEAN countries. Finally, the development of this region should promote a better information exchange free of the hindrance of the Cold War structure. In terms of infrastructure, physical structure such as transportation, power supply and telecommunications have always been stressed. However, even if this region has potential in energy resources, the information has not been made available due to budget constraints and red tape. There is no doubt as to the importance of infrastructure in this region. However, since large construction projects benefit only a limited number of people directly, the invisible infrastructure must make a greater contribution towards sustainable development of the region. It will be to the latecomer’s advantage to use the information network, including high-tech tools such as the Internet, to find marketable products which take advantage of this region’s rich endowments.

Notes 1 In response to the DPRK’s positive approach to the ROK’s investment, KOTRA has reportedly opened a liaison office in the Free Economic and Trade Zone. Hanguk Ilbo, May 2, 1996. 2 Based on the RCA (Revealed Comparative Advantage) index, Ha Cheong Yeon concluded that potential carrying-in commodities from North Korea are agriculture and forestry products, fishing products, minerals, petrochemical products, fabrics, non-metallic products such as diamonds, non-ferrous metals including aluminium, lead and their alloys and machinery. See Ha-Cheong Yeon in Lee-Jay Cho and Yoon Hyung Kim (1995). 3 On the Mongolian development strategy, see Kuribayashi (1993).

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References Ha Cheong Yeon (1995) ‘Inter-Korea Economic Relations’, in Lee-Jay Cho and Yoon Hyong Kim (eds), Economic Systems in South and North Korea—The Agenda for Economic Integration, Korea Development Institute (KDI): Seoul. Han Hong-Xi (1993) ‘The Present State and Role of the Border Trade’, Asia Keizai, vol. 34, no. 7, July 1993. Institute of Developing Economies (IDE): Tokyo. Kuribayashi, Sumio (1993) ‘Mongolia: Issues in Creating Development Strategy,’ in Kuribayashi, Sumio (ed.) Rethinking Development Strategy in Northeast Asia, The Sasakawa Peace Foundation: Tokyo.

4

Growth triangles in Singapore, Malaysia and ASEAN: lessons for subregional cooperation Lee Tsao Yuan

The momentum for the formation of subregional zones in ASEAN has been gathering steam. These subregional zones in ASEAN have come to be known as growth triangles, a term coined in December 1989 by the then First Deputy Prime Minister of Singapore, Mr. Goh Chok Tong, to refer to the economic collaboration among three participating areas—the southernmost state of Johor in Malaysia, Singapore, and the Riau islands of Indonesia, notably Batam, Bintan, Bulan and Karimun (Straits Times, 21 December 1989; see Figure 4.1). This arrangement has subsequently come to be known as the Johor–Singapore–Riau (JSR) Growth Triangle, the Southern Growth Triangle (as opposed to the Northern Growth Triangle) and Sijori (incorporating the first two letters of Singapore, Johor and Riau). Other growth triangles have also been proposed in ASEAN: the Northern Growth Triangle comprising the northern states of Malaysia (in particular, the island of Penang), northern Sumatra (including the city of Medan) and southern Thailand; and Davao in the Philippines, Manado in the Sulawesi island of Indonesia, and Sandakan in Sabah, East Malaysia (see Figure 4.2). Such subregional arrangements were also endorsed at the ASEAN Summit meeting in Singapore in January 1992 as a means to complement overall ASEAN economic cooperation.1 In light of this knee interest in the growth triangle concept, it is perhaps timely to take stock of the first growth triangle, the only one in operation in Southeast Asia, and to ask what lessons can be learnt from this example of subregional cooperation in ASEAN. 89

90

ASIA’S BORDERLESS ECONOMY

Figure 4.1 The Johor–Singapore–Riau Growth Triangle

What is the JSR Growth Triangle?2 Very briefly, the JSR Growth Triangle is a cooperative arrangement which offers a comprehensive and integrated locational package to investors, both local and foreign alike. What ties the entire arrangement together is geographical proximity (see Figure 4.1). Johor and Singapore are linked by a short causeway, while Batam and Bintan are less than an hour’s ferry ride from Singapore. Manufacturing companies can take advantage of the complementarity in factor and cost profiles of these various areas within the subregion and locate their activities accordingly. The synergy arises because the subregion is borderless where capital and goods are concerned, but barriers to the free movement of labour still preserve wage differences. Complementarity in tourist and leisure activities is also achieved by combining the 6 million tourist throughput of Singapore (and 2.8 million Singaporeans) with the beaches, golf, shopping and seafood of Johor and the Riau islands. There are, in addition, an oil terminal and ship-repair yard being proposed for the Riau island of Karimun to take advantage of Singapore’s position as an oil-refining centre and one of the busiest ports in the world. Agribusiness industries, such as pig and orchid farms on the Riau islands of Bulan and Bintan,

Figure 4.2 Some proposed growth triangles in ASEAN

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ASIA’S BORDERLESS ECONOMY

cater to the demand in Singapore and utilise the freight services of Singapore for export to other countries. There are also bilateral water agreements between Johor and Singapore, and Indonesia and Singapore. At a more conceptual level, the JSR Growth Triangle can be classified as a growth pole spillover phenomenon, which is one category of subregional zones which have emerged in the Asia-Pacific (Chia and Lee, 1993).3 McGee and Macleod (1992) call this concept the ‘extended metropolis region’, while Scalapino (1991) has introduced the term ‘Natural Economic Territories’ or NETs.4 In short, the two key features of the JSR Growth Triangle are first, economic complementarity, and secondly, geographical proximity. The first feature distinguishes subregional zones from the typical growth pole spillover phenomenon found within a country, as borders preserve factor price differences in labour and land, while liberal foreign investment regulations enable capital to flow across borders. The second feature distinguishes a subregional zone from the usual flows of foreign investment and tourism, for example, from Singapore to Vietnam. The neighbourhood effect naturally creates a greater density of economic activity. Lessons from the JSR Growth Triangle There are six lessons which can be learnt from the experience of the JSR Growth Triangle. They are: 1 2 3 4 5 6

the growth triangle is primarily an economic, and not political, concept; while there is a mix of government and private sector participation, the engine of growth is clearly the private sector. there are economic benefits for the participating areas; participants must be prepared for the political and social repercussions and manage them sensitively and carefully; the growth triangle should start on a small scale, but should allow cooperation to extend beyond the original participating areas to other areas; and the rationale for growth triangle is that they provide additional competitive advantage for participating nations. The rest of this chapter will elaborate on these six themes.

Lesson 1: The growth triangle is an economic concept The first and foremost lesson is that the growth triangle is primarily an economic, and not political, concept. If the subregional zone is

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93

to get off the drawing board at all, it must be, economically, an attractive location for business. This can occur in two ways. Either there is complementarity in factor and cost profiles, as mentioned earlier, or there is joint development of infrastructure or resources in the zone, such as the treatment of water in the Riau islands for consumption in both Singapore and Indonesia. Politically motivated growth triangles simply will not fly. This is evident from the genesis of the JSR Growth Triangle concept itself. Although the Indonesian and Singapore governments signed the Agreement on the Economic Cooperation in the Framework of the Development of Batam in 1980, it was not until 1989 that significant steps forward were taken with regard to joint development of Batam. This was because the economics of the situation only became workable in the late 1980s, for several reasons. First, Indonesia and Malaysia began to experience unprecedented and continued rapid growth in the mid-1980s. This was due to a number of factors. Internally, the process of economic liberalisation, deregulation of trade, investment and capital controls and privatisation created a new internal dynamism as a result of increased efficiencies. In particular, the relaxation of foreign investment regulations occurred at a time when there were large outflows of capital from Japan, Hong Kong, Korea and Taiwan. Manufactured exports became, for the first time, the major export of these countries. The rapid growth led, in turn, to a new-found self-confidence in Indonesia’s and Malaysia’s ability to compete in world markets, as well as a strengthened conviction regarding the beneficial effects of foreign investment. The economic mood was therefore different, and this helped to pave the way for greater economic cooperation to follow. Secondly, Singapore in the later 1980s was facing the constraints of a tight labour market and limited land. With economic recovery from the 1985/86 recession, wage rates were once again increasing rapidly (Table 4.1). Manufacturers complained about the inability to recruit workers. Property prices were also increasing (Table 4.2). In short, Singapore was bursting at its economic seams and, just as Hong Kong before it, there were powerful push factors causing manufacturing companies to relocate their labour-intensive production processes to cheaper locations.5 Thirdly, the thinking in both Indonesia and Johor with regard to further cooperation with Singapore also evolved. An influential study conducted by the Malaysian Institute of Economic Research, called the Johor Economic Plan 1990–2005, was completed in March 1989. The report stated that, while Johor state had performed relatively well in the 1970s vis-à-vis the Malaysian economy as a result of high commodity prices, a relative slowdown had occurred in the first half of the 1980s and Johor’s GDP per capita

Table 4.1 Singapore: average monthly earnings for all workers, 1981–94 1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Nominal (S$) Total Annual % Change

741 –

859 15.9

947 10.2

1048 10.7

1131 7.9

1140 0.8

1176 3.2

1273 8.2

1398 9.8

1528 9.3

1669 9.2

1804 8.1

1918 6.3

2086 8.8

Manufacturing Annual % Change

661 –

732 10.7

818 11.7

892 9.0

964 8.1

976 1.2

1009 3.4

1116 10.6

1243 11.4

1395 12.2

1552 11.3

1686 8.6

1818 7.8

1995 9.7

Nominal (US$) Total Annual % Change

350.7 –

401.4 14.5

448.1 11.6

491.3 9.7

514.0 4.6

523.6 1.9

558.4 6.7

632.6 13.3

716.8 13.3

843.0 1107.4 17.6 14.6

Manufacturing Annual % Change

312.9 –

342.1 9.3

387.0 13.1

418.2 8.0

438.1 4.8

448.2 2.3

479.1 6.9

554.6 15.7

637.3 14.9

769.7 898.4 1035.0 1125.1 1306.1 20.8 16.7 15.2 8.7 16.1

Exchange Rate (S$/US$) Annual % Change

1107 1187.0 1365.7 14.6 7.2 15.1

2.1127 2.1400 2.1136 2.1331 2.2002 2.1774 2.1060 2.0124 1.9503 1.8125 1.7276 1.6290 1.6158 1.5274 –

1.3

–12

0.9

3.1

–1.0

–3.3

–4.4

–3.1

Real (S$) Total Annual % Change

805 –

898 11.6

978 8.9

1 055 7.9

1 133 7.4

1 159 2.3

1 189 2.6

1 268 6.6

Manufacturing Annual % Change

718 –

765 6.5

845 10.5

898 6.3

966 7.6

992 2.7

1 020 2.8

1 112 9.0

–7.1

–4.7

–5.7

–0.8

–5.5

1 360 7.3

1 437 1 517 5.7 5.6

1 604 5.7

1 665 3.8

1 749 5.0

1 209 8.7

1 312 1 411 8.5 7.5

1 499 6.2

1 578 5.3

1 672 6.0

Notes: 1 Real earnings refer to the nominal earnings deflated by the corresponding year’s Consumer Price Index (September 1987–August 1988 = 100). 2 Starting from 1981, average monthly earnings are computed using data obtained from the Central Provident Fund Board which includes bonuses, if any, but excludes employers’ Central Provident Fund contributions. Sources: Ministry of Labour, Singapore Yearbook of Labour Statistics, various issues, Singapore: Singapore National Printers, Department of Statistics, Singapore Yearbook of Statistics, various issues, Singapore: Singapore National Printers.

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GROWTH TRIANGLES IN SINGAPORE, MALAYSIA AND ASEAN

Table 4.2

Singapore: property price trends, 1980–91 (S$ per square metre)

Industrial properties Year

Prime flatted factory Monthly rental Sale price

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

6.46 11.30 10.23 10.23 8.93 7.86 6.78 7.53 9.15 17.22 30.14 27.98

1292 2691 2422 2045 1776 1453 1076 1345 1453 2368 3229 3121

Prime flatted warehouse Monthly rental Sale price 9.69 17.22 1561 14.53 13.13 11.41 8.93 9.69 10.76 19.38 30.14 26.91

1830 3767 3122 2691 2260 1830 1345 1453 1561 3014 3767 3552

Commercial properties Year

Prime office space Monthly rental Sale price

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

48.50 86.00 75.50 64.50 53.80 48.50 43.10 45.80 59.20 91.50 123.80 113.00

13 347 18 300 16 038 13 563 10 226 8073 6351 8073 11 840 16 146 17 222 16 146

Prime retail space Monthly rental Sale price 183.00 323.00 269.00 237.00 227.00 215.00 194.00 215.00 431.00 592.00 592.00 484.00

31 53 45 39 36 26 25 31 53 91 91 80

205 820 208 826 597 910 833 215 820 493 493 730

Sources: Ng and Wong (1991)

relative to that of Peninsular Malaysia had declined. The study therefore suggested the need for a restructuring of the Johor economy in order to meet future growth targets. This involved the transformation of the state from a plantation-based primary export economy into a newly industrialised state. A four pronged strategy was advocated: i ii

accelerated industrialisation and commercialisation of agriculture, the largest sector of the state economy; economic twinning with Singapore;

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ASIA’S BORDERLESS ECONOMY

iii active promotion of investments from Japan and the Asian NIEs; and iv the development of Johor as a southern growth pole for the rest of Malaysia. The study recognised the benefits of the opportunities associated with Johor’s proximity to Singapore. It stated the spillover effects as including: i

the tourist spillover and the marketing of Johor as a twin destination to Singapore; ii the industrial spillover, involving the promotion of Johor as a location for manufacturing industry, both resource- and nonresource-based, such as apparel and textiles, electronic/electrical, non-electrical machinery and metallic products; iii the market spillover, where Johor could be a major supplier of food and fresh provisions; and iv the infrastructure link, through the gas pipeline, and joint water supply project, the causeway expansion and the Malaysian North–South Highway. There was recognition that Johor possessed distinct advantages in various factor endowments, resulting in cheaper labour and land and overall relative cost competitiveness. To these could be added the further attraction of a variety of tax incentives such as pioneer status, investment tax allowance, export incentives, incentives for training and R & D as well as very liberal exchange controls. On the Indonesian side, the Minister of State for Research and Technology, Dr. Habibie, had two implementation guidelines in mind for Batam when he took over leadership of the Batam Island Industrial Development Authority in 1978 (Habibie, 1992). The first was the ‘balloon theory’ which depicted the economies of Singapore, Batam and Malaysia as a system of balloons linked to each other by valves. The basic idea was that: the economies of the area could only continue to expand without bursting by being linked to each other and, at some later point, to the economies of still other areas as well. Singapore would be able to continue to expand if linked to Malaysia and Batam. They, in turn, would have to be linked to other areas in order to take off excess pressure (pp. 3–4).

The second idea was to create an area where: rules and procedures with respect to immigration, customs, and communications would have to be harmonized in order to make the flow

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97

of people, goods and services easier and faster. The area around Singapore should become like the Benelux (p. 5)

These ideas were first described to the then Prime Minister of Singapore, Lee Kuan Yew, of Singapore in March 1979 during his visit to Batam, but they came to fruition only ten years later in 1989, largely because of internal developments in each country. The economic profiles of Singapore on the one hand, and Johor and the Riau islands on the other, made the concept feasible in the late 1980s. It is also interesting to set the growth triangle in the larger context of ASEAN economic cooperation. ASEAN as a regional grouping comprising Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand was formed in 1967.6 Although its principal aim was supposedly to foster greater economic cooperation, in reality the more fundamental purpose was to ensure harmonious political relations in a region which historically had been prone to conflict. This was to be achieved by confidence-building measures centered around economic and cultural cooperation. A number of economic cooperation schemes were indeed initiated in ASEAN, such as Preferential Trading Arrangements, the ASEAN Industrial Joint Venture scheme and the ASEAN Industrial Complementation scheme. But there were difficulties in implementation and their performance was lacklustre. With hindsight, this was hardly surprising, for a number of reasons. First, the raison d’être of ASEAN was really a common policy as regards the Cambodian conflict. This has been admitted as the glue which held ASEAN together. Secondly, there was not a high level of economic interdependence among ASEAN countries. For example, intra-ASEAN trade has always been small as a proportion of the total trade of each ASEAN country. The major markets were extra-ASEAN, principally, the US and Japan. Nor was the level of intra-ASEAN investment high, as the major foreign investors have been the US and Japan and, more recently, the Asian NIEs. One reason for the low level of intra-ASEAN economic interdependence was the economic structure of ASEAN countries. Not only was the level of development low, but the major exports were oil and agricultural commodities. In such a situation, the benefits of economic cooperation are necessarily minimal. There was, however, one exception to this, and that was Singapore, a city-state with no natural resources, historically a commercial centre for Southeast Asia, and with a relatively high per capita income. Trade and investment between Malaysia and Singapore also constituted a large proportion of total intra-ASEAN trade and investment because of historical close ties. There was some concern among the other ASEAN countries that economic cooperation schemes would benefit Singapore more than the other countries, resulting in a

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ASIA’S BORDERLESS ECONOMY

reluctance to proceed further with the implementation of such schemes. The assessment that economic cooperation would not yield much net benefit was given more prominence by the more nationalistic approaches to economic development which were adopted by some of the ASEAN countries. If this situation had continued, it would be doubtful whether the growth triangle concept would have seen fruition. However, the situation changed dramatically in the late 1980s. On the political front, the end of the Cold War and the impending solution to the Cambodian problem led to a major re-thinking in ASEAN and to a search for a new binding glue. The conclusion was that this glue should largely consist of economic cooperation. At the same time, the formation of the North American Free Trade Agreement (NAFTA) and the opening up of both China and Vietnam raised concerns regarding the continued ability of ASEAN to sustain its economic competitiveness. Both NAFTA and China had larger markets than what each individual ASEAN country could offer. ASEAN therefore came up with two responses. The first was the adoption of the growth triangle as an ASEAN concept. The ASEAN Economic Ministers Meeting in Bali, Indonesia in October 1990 noted that the growth triangle arrangement should be used as a model for further strengthening ASEAN economic cooperation. The ASEAN Summit in Singapore in January 1991 also endorsed the arrangement as a means of strengthening economic cooperation within ASEAN. The second response was the historic decision to form an ASEAN Free Trade Area (AFTA) within fifteen years.7 In some ways, the growth triangle can be seen as an intermediate step in economic cooperation before the realisation of the larger and more complicated AFTA. There are, of course, major conceptual differences between the two.8 But one major advantage of the growth triangle concept is that it is informal, involves fewer countries, and is therefore easier to realise than a free trade area. Lesson 2: The roles of government and the private sector The second lesson is that the growth triangle concept involves the participation of both the public and private sectors in order to make it a success. It is the private sector which does the investing and which generates the value added, employment and economic growth. The role of the public sector is, in essence, to facilitate such investments. The role of the public sector Inter-governmental cooperation in the JSR Growth Triangle comprises the following. First, there was high-

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99

profile endorsement of the arrangement in all three countries, as well as in ASEAN. This was crucial as it set the tone for, and facilitated, cooperation at all levels of the government bureaucracy. One example of high-level political support is the two joint Indonesia–Singapore investment promotion missions undertaken to market the investment opportunities in Batam/Bintan. The first was to Osaka in December 1990, and the second to Hong Kong, Korea and Taiwan in September 1991. These trips were led by ministers of both countries and served as important signals of government backing of the joint development. Secondly, there are a series of bilateral agreements between Indonesia and Singapore. Two agreements were signed in August 1990 which provided the framework for the joint development of Riau. The Agreement on Economic Cooperation in the Framework of the Development of the Riau Province is an enlargement of the Batam Economic Cooperation Agreement of 1980. The Agreement on the Promotion and Protection of Investments supplements the ASEAN Investment Guarantee Agreement. A third bilateral agreement, signed in June 1991, provided for the joint development of water resources in Riau, under which Singapore is guaranteed water supply from the Riau island of Bintan for at least 50 years. There are, to date, no bilateral agreements signed between Malaysia and Singapore regarding economic cooperation in Johor. The new water agreement between the Singapore Public Utilities Board and Johor was signed in November 1990 and updates the 1962 water agreement (Straits Times, 28 June 1991). Thirdly, two bilateral committees were established to coordinate ongoing cooperative efforts—a joint Indonesia–Singapore ministerial committee for Riau, and the Johor–Singapore Joint Committee on Business Cooperation, established in March 1989. Fourthly, the liberalisation of foreign investment regulations, in Malaysia in 1986 and Batam in 1989, was instrumental in the subsequent rapid inflow of foreign capital. It was after the meeting of the then Prime Minister Lee Kuan Yew and President Suharto that it was announced that 100 per cent foreign equity ownership was allowed on Batam for the first five years, after which there was to be a 5 per cent divestment, with no further divestment required if the company were 100 per cent export-oriented.9 Investment applications could be processed in Batam itself rather than at the Investment Board (BKPM) in Jakarta. The private sector was also allowed to establish industrial estates in Indonesia. Fifthly, Batam had been declared a duty-free zone with respect to Singapore in 1978. Majority export-oriented companies in Malaysia are also eligible for bonded warehouse status, i.e. there could be duty-free importation of intermediate products and export of final

100

ASIA’S BORDERLESS ECONOMY

goods. In other words, the JSR Growth Triangle has arrangements which allow for the free internal movement of goods. Sixthly, there has been some effort at simplifying customs and immigration procedures. For example, a smart card, which enables the computerised processing of immigration procedures, was introduced in October 1991 to facilitate travel to Batam Industrial Park for Singapore-based executives. The addition of more bays at the Johor Immigration check-point has also reduced the traffic build-up at the Causeway. Seventhly, the availability of infrastructure, both general and industrial, is important to attract companies to any location. The infrastructure in Johor is already fairly well developed, although more could be done to cope with the increased demands on the roads, telecommunications and housing facilities due to rapid growth. The basic infrastructure in Batam, such as the road network, port and ferry terminal, was also in place by the late 1980s. What was needed was additional industrial infrastructure. The private sector as the engine of growth The role of the government is therefore to provide a conducive environment, including political, tax and physical infrastructure, for business (Lee, 1992b). But it is the private sector which does the investing. This is clearly the case in Johor, which has seen a rapid inflow of foreign investors, both Singapore- and non-Singapore-based, as will be discussed later. The private sector development of infrastructure in Batam and Bintan is worthy of note. Since infrastructure development typically involves large investment and a long gestation period as well as specific expertise, a consortium approach is often most appropriate. This is the case with regard to the development of industrial infrastructure in both Batam and Bintan. Joint ventures from both Indonesia and Singapore are involved, including that of Singapore Government-Linked Companies (GLCs). As was mentioned previously, this occurred only after Indonesia relaxed the ruling allowing the private sector to engage in infrastructural projects. In Batam, at least eight industrial estates are being planned or are under construction.10 The earliest to begin operations, in early 1990, was the Batam Industrial Park, a joint venture between one of Indonesia’s largest conglomerates, the Salim Group, and two Singapore GovernmentLinked Companies, Singapore Technologies Industrial Corporation and Jurong Environmental Engineering. The Industrial park, which is designed to provide investors with a hassle-free one-stop business centre, has its own utility centre and workers’ living quarters. A consortium of major Indonesian and Singapore industrial and financial services companies is spearheading development on Bintan Island, most notably the Bintan Integrated Development Project, of which the

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101

first and second projects are the Bintan Beach International Resort and the Bintan Industrial Estate. Lesson 3: Economic benefits One of the most important issues facing any government in deciding whether to establish a cooperative subregional arrangement like the growth triangle is how the country/province can gain from it. It is therefore worth going into detail regarding the economic benefits for all three participating areas in the JSR Growth Triangle. The following paragraphs draw heavily from Lee (1992c). Riau Islands: Batam On the Indonesian side, the growth triangle began with the inclusion of Batam Island. Both because of this, and also because of the separate statistics compiled and published for Batam by the Batam Industrial Development Authority, it is easiest to assess the net benefits for Batam Island. It is also too early to assess the net benefits for the other Riau islands at this stage, since active joint development on Bintan began only in 1991. Batam was designated as a logistics base for oil industries in 1970 as part of Indonesia’s offshore petroleum exploration effort which began in 1968. The development of Batam as an industrial area began in 1973 and it was declared a duty free zone in 1978. The basic infrastructure on Batam, such as the road system and port, were also built well before the mid-1980s. However, all economic indicators point towards an unprecedented economic boom on Batam since the mid-1980s, especially since the late 1980s. Ahmad (1992) says that the Batam boom started in 1988. The workforce, which increased by about one-third from over 6000 to over 9000 between 1985 and 1988, increased more than threefold between 1988 and 1992 with average annual growth rates averaging about 40 per cent in 1990–92 (Table 4.3). Population growth has been less dramatic, but nevertheless has increased from nearly 80 000 to 123 000 in 1992. Exports from Batam registered a spectacular increase, doubling between 1986 and 1988, with more than a ten-fold increase from 1989 to 1992. Foreign investment approvals increased from US$65 million in 1988 to nearly US$300 million in 1990. Foreign investment accounted for over a quarter of total investment on Batam, or about a third of total private investment, at the end of 1992 (Table 4.4). Like manufacturing, tourism is also a relatively new economic activity in Batam. In 1983, Batam accounted for 3.4 per cent of total visitor arrivals in Indonesia (Table 4.3). This increased to 14.0 per cent (146 000) by 1987 and to nearly 650 000 arrivals by 1992, 21

102

ASIA’S BORDERLESS ECONOMY

per cent of the Indonesian total. In fact, Batam overtook Bali to become the second most important port of the entry in Indonesia after Jakarta in 1990. The interesting question is how much of this recent growth in Batam is attributable to the growth triangle arrangement. There has been an increase in investment in Batam since 1984, particularly in the oil mining equipment industry (Ahmad, 1992). But 1988–89 was definitely a watershed period for Batam, because of the two major policy changes which occurred with regard to relaxation of foreign investment regulations and private sector development of infrastructure. This was undoubtedly the reason for the jump in foreign investment inflows in 1988–90. The role of Singapore is quite significant in the recent economic boom on Batam. Of the total foreign investment of US$1.09 billion at the end of 1992, investment from Singapore-based companies (both local and foreign) accounted for 45 per cent (Table 4.5). In terms of numbers, Singapore-based companies accounted for 57 per cent of the total number of foreign companies in Batam. As mentioned previously, Batam Industrial Park is owned and managed by a joint venture with the active involvement of two Singapore companies. Singaporeans also accounted for the majority of tourists in Batam in the last few years. In 1990 and 1991, for example, nearly 70 per cent of visitor arrivals in Batam were Singaporeans (Table 4.6). If the

Table 4.3

Batam: main economic indicators

Year

Pop’n

1973 1978 1983 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

6000 31 800 43 000 58 000 – – 79 400 90 500 95 800 107 600 123 000 146 214 162 477 168 222

% Workgrowth force

% Exports % Approved Tourist As % of growth (US$ growth foreign arrivals the total mil.) investment (’000) in (US$mil.) Indonesia

– – – – – – – 14.0 5.8 12.3 14.4 18.9 11.1 –

– – – – – – – – 9.8 20.9 27.4 26.8 7.8 44.2 16.1 53.0 46.1 151.5 42.2 242.0 38.0 564.5 37.1 925.7 60.3 1338.9 – 1055.0

– – – 6389 7013 8935 9631 11 181 16 336 23 237 32 071 43 956 70 446 77 638

– – – – – 28.2 64.9 19.9 185.8 59.7 133.1 64.0 44.6 –

– – 148.0 7.0 1.0 0.0 65.4 139.3 295.6 – – – – –

– – – 60 84 146 228 359 579 606 656 710 889 947

Note: Figures for 1995 cover only the months January–June. Source: Batam Industrial Development Authority, development data up to June 1995.

– – – 8.0 10.0 14.0 18.0 22.0 27.0 23.6 26.4 25.6 27.3 27.2

103

GROWTH TRIANGLES IN SINGAPORE, MALAYSIA AND ASEAN

Table 4.4 Statistics on total investment in Batam Island as at June 1995 (US$mil.) Total investment Government investment Private investment Domestic investment Foreign investment

5334.9 931.8 4403.1 2372.2 2030.9 (share, %)

Private investment Industry Trade & service Agrobusiness Tourism Real estate Foreign investment Machinery, metal & electronics Chemical Others Source:

100.0 54.1 11.0 2.2 17.4 15.2 100.0 59.5 1.7 38.8

Batam Industrial Development Authority, Development Data.

Table 4.5 Foreign investment by home country in Batam Island as at December 1992

Total investment Foreign investment Singapore United States Japan Hong Kong Netherlands Taiwan Others

Total foreign companies Singapore United States Japan Hong Kong United Kingdom Netherlands Taiwan Korea France Others Source:

US ($bil)

% share

3.80 1.09 0.49 0.17 0.13 0.12 0.05 0.02 0.10

100.0 45.3 15.7 11.8 11.3 4.5 2.1 9.3

Number

% share

123 70 14 10 6 4 3 3 3 2 8

100.0 56.9 11.4 8.1 4.9 3.3 2.4 2.4 2.4 1.6 6.5

Batam Industrial Development Authority, development data up to December 1992.

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ASIA’S BORDERLESS ECONOMY

Table 4.6

Visitor arrivals to Indonesia by nationality and port of entry, 1988–91 1988

Nationality

Jakarta

Singapore Japan Taiwan Europe Americas Others Total

69 370 123 466 27 911 199 177 47 427 110 243 537 594

% share 12.9 23.0 5.2 29.6 8.8 20.5 100.0

Bali

% share

Batam

9785 2.8 186 622 22 922 6.5 3014 3574 1.0 9 144 457 41.1 6906 32 971 9.4 3182 137 800 39.2 28 247 351 509 100.0 227 980

% share

Total

81.9 319 1.3 160 0.0 34 3.0 351 1.4 90 12.4 344 100.0 1301

% share

914 726 181 898 140 190 049

24.6 12.4 2.6 27.0 6.9 26.5 100.0

Total

% share

76.1 421 599 2.0 198 055 3.3 61 829 3.8 410 707 1.6 105 894 13.2 427 881 100.0 1625 965

25.9 12.2 3.8 25.3 6.5 26.3 100.0

% share

% share

1989 Nationality

Jakarta

% share

Bali

Singapore Japan Taiwan Europe Americas Others Total

83 639 141 327 38 285 184 753 54 363 128 235 630 602

13.3 13 475 22.4 45 199 6.1 5128 29.3 150 556 8.6 36 189 20.3 175 291 100.0 425 838

Nationality

Jakarta

% share

Singapore Japan Taiwan Europe Americas Others Total

103 760 177 093 59 200 248 263 70 993 185 792 845 101

Nationality

Jakarta

Singapore Japan Taiwan Europe Americas Others Total

90 197 166 245 79 543 226 293 65 667 216 844 844 789

% share

Batam

3.2 273 490 10.6 7097 1.2 12 002 35.4 13 588 8.5 5711 41.2 47 609 100.0 359 497

% share

1990 Bali

12.3 13 360 21.0 73 374 7.0 6516 29.4 172 267 8.4 43 730 22.0 167 193 100.0 476 440

% share

Batam

2.8 404 259 15.4 11 480 1.4 49 677 36.2 27 283 9.2 8763 35.1 76 871 100.0 578 333

Total

69.9 582 2.0 267 8.6 124 4.7 540 1.5 134 13.3 527 100.0 2177

734 970 397 618 698 149 566

26.8 12.3 5.7 24.8 6.2 24.2 100.0

Total

% share

1991

Note:

% share

Bali

10.7 17 186 19.7 91 530 9.4 31 336 26.8 184 769 7.8 45 662 25.7 197 145 100.0 567 628

% share

Batam

3.0 417 766 16.1 19 660 5.5 37 556 32.6 28 698 8.0 10 641 34.7 92 516 100.0 606 837

% share

68.8 684 3.2 294 6.2 163 4.7 541 1.8 138 15.2 747 100.0 2569

737 664 943 107 062 357 870

26.6 11.5 6.4 21.1 5.4 29.1 100.0

Americas comprises USA, Canada, Central America and South America.

Source: Department of Tourism, Posts and Telecommunications, Statistics Report on Visitor Arrivals to Indonesia, various issues.

GROWTH TRIANGLES IN SINGAPORE, MALAYSIA AND ASEAN

105

expatriates who reside in Singapore and the tourists who visit Singapore are included, the figures would no doubt be even higher. Lee (1992c) also compares Singapore’s involvement in Batam with Singapore’s involvement in Indonesia as a whole, in terms of exports, investments and tourism. Suppose all exports from Batam were destined for Singapore. This is an over-estimation, but perhaps not excessively so. Then, exports from Batam to Singapore as a proportion of total Indonesian exports to Singapore would increase from a negligible 0.9 per cent in 1986 to 8.7 per cent in 1991, signifying a more than proportionate increase in exports from Indonesia to Singapore originating from Batam, even if one were to allow for some over-estimation in the first place. In terms of location of foreign investment in Indonesia, the share of Riau province has increased, so that in terms of the cumulative total (1967–91), Riau is fourth after West Java, Jakarta and East Java. Although a further breakdown of the Riau figures is not available, it is probable that Batam would account for a major share of the increasing popularity of Riau as a location for foreign investment. Also, while Singapore based investments constitute the largest source of foreign investment in Batam, investment from Northeast Asia, particularly from Japan and Taiwan, is more important for the rest of Indonesia. As for visitor arrivals, Singaporeans have comprised the largest group of tourists in Indonesia since 1989, with Batam as the most popular port of entry. In short, the available statistics point towards a significant contribution by Singapore-based companies and Singaporean tourists to the economic development of Batam since the late 1980s, more so than for the rest of Indonesia. The short ferry ride and the ‘neighbourhood effect’ is undoubtedly a major reason for the close economic relations between the two islands. However, the macroeconomic statistics tell only a part of the story. There is a whole range of microeconomic issues which have yet to be explored and on which there is very little information. For example, the establishment of manufacturing facilities in Batam, such as the electronics assembly in Batam Industrial Park, could be useful as a means of technology transfer. There is anecdotal evidence of companies upgrading their Batam operations after having found the productivity of workers in Batam satisfactory. At the broadest level, the Indonesian Industry Minister, Tunky Ariwibowo, has said that Indonesia’s connections with Singapore continued to serve as an important aspect of the efforts to make Indonesia, and the Riau islands in particular, attractive to business and investment (Straits Times, 30 June 1993). He also said that Indonesia would continue to use, to the maximum extent, Singapore’s position in the global network in terms of the banking system, the

106

ASIA’S BORDERLESS ECONOMY

communications system and the transport system, in order to gain benefits from such linkages. Johor It is difficult to determine the effect of the growth triangle, namely, the twinning of Johor with Singapore, on Johor’s economic growth. This difficulty stems from the isolation of this effect from that of other factors, in particular, the general macroeconomic environment of Malaysia. Lee (1992c) has discussed the Singapore–Johor connection in the overall context of Johor in Malaysia as well as with regard to Singapore–Malaysia economic relations. Table 4.7 shows some basic indicators of the Johor economy. The rising importance of manufacturing and the relative decline in the agricultural sector is evident even within the four years 1989–92. GDP growth rates of the Johor economy have also been rapid. Johor is a middle-income state in Malaysia, with a per capita GDP that has remained steady at 0.91 times the national average in both 1970 and 1990. This implies that Johor has, on average, grown as rapidly as Malaysia as a whole in the 1970s and 1980s. This also implies that the overall macroeconomic environment in Malaysia has been the major factor in determining the overall rate of economic growth in Johor. In particular, the relaxation of foreign investment regulations in 1986 was instrumental in attracting the inflow of investments from Northeast Asia at a time when that area’s domestic labour costs and currency appreciation constituted powerful push factors for the offshore relocation of production processes. Johor’s infrastructure has also been fairly well developed and the Johor State Economic Development Corporation has been active in promoting the state as an investment location. However, as mentioned previously, it is envisaged that the twinning of Johor with Singapore, together with other economic restructuring policies, will enable Johor to become the southern growth center in Malaysia, together with the other two growth centers mentioned in the Sixth Malaysia Plan—Kuala Lumpur/Selangor and Pulau Pinang. For example, Selangor, Penang and Johor are the three most important locations for foreign investment in Malaysia (see Tables 4.8 and 4.9). Due to this additional boost, it was expected that Johor’s per capita GDP would increase to 1.01 times the national average in 1995 (Sixth Malaysia Plan, p. 39) and to 1.04 times the average by the year 2000 (Second Outline Perspective Plan, p. 125). In other words, Johor is expected to grow faster than the planned national average of 7 per cent in the 1990s, due to its linkages with Singapore within the growth triangle framework. While there are statistics on trade between Malaysia and Singapore, there are no separate statistics on trade between Singapore

107

GROWTH TRIANGLES IN SINGAPORE, MALAYSIA AND ASEAN

Table 4.7 Johor: basic facts and GDP growth rates by sector, 1989–93 Basic facts 1991 Area Population Per capita GDP

18941 sq.km 2.2 million M$3918

1989 1990 1991 1992 1993f* Annual growth rates (At 1978 prices in M$mil.) 1990 1991 1992 1993f* Agriculture, forestry, fisheries 2378 Share 32.6 Mining & quarrying 72 Share 1.0 Manufacturing 1896 Share 26.0 Construction 216 Share 3.0 Electricity, gas & water 98 Share 1.3 Transport & communication 537 Share 7.4 Wholesale & retail, hotels, restaurants 682 Share 9.4 Finance, insurance, property, business services 576 Share 7.9 Government services 762 Share 10.5 Other services 72 Share 1.0 Total 7289 Share 100.0

2452 31.0 82 1.0 2158 27.3 237 3.0

2528 2606 29.3 27.7 87 92 1.0 1.0 2471 2841 28.7 30.2 263 294 3.1 3.1

2680 3.1 26.0 97 10.0 0.9 3281 13.8 31.8 331 9.6 3.2

3.1

3.1

2.9

6.4

5.5

5.3

14.5 15.0

15.5

10.8 12.0

12.6

105 1.3

115 1.3

125 1.3

135 1.3

6.7

9.1

8.6

8.6

593 7.5

656 7.6

716 7.6

780 10.5 7.6

10.7

9.2

9.0

756 9.6

845 9.8

944 10.0

1049 10.9 10.2

11.8 11.8

11.2

635 706 783 870 10.2 8.0 8.2 8.3 8.4 812 868 928 990 6.5 10.3 10.1 9.9 9.6 78 83 89 95 7.7 1.0 1.0 0.9 0.9 7908 8622 9418 10 308 8.5 100.0 100.0 100.0 100.0

11.2 11.0

11.2

6.9

6.9

6.7

6.9

6.9

6.5

9.0

9.2

9.4

Note: * forecast Sources: Johor State Economic Development Corporation, Johor Economic Report, 1992/93, Johor Investment Guide 1992.

and Johor, nor can there be as there are no barriers, natural or otherwise, between Johor and the other states in Peninsular Malaysia. 11 Similarly for tourism. We do know, however, that trade and tourism flows are large and increasing. For example, while about a quarter of Malaysia’s imports and exports originated or passed through Singapore in 1980, this figure has progressively increased to well over 40 per cent in 1991, on account of the use of Singapore’s port and airport facilities as well as increasing

108

ASIA’S BORDERLESS ECONOMY

intra-industry and intra-firm trade (Lee, 1992a). Singaporeans still comprise by far the largest group of tourists in Malaysia—nearly 60 per cent in 1991—although this percentage has fallen relative to the inflow of non-Singaporean tourists since 1986. It is to be expected that Johor is one of the most popular destinations in Malaysia for Singaporeans. For example, the majority of Singaporeans (87 per cent in the first quarter of 1992) enter Malaysia by land via Johor Bahru. There is anecdotal evidence that many of these tourists make day trips to Johor for shopping, dining, golf and entertainment. There is more detailed data regarding Singaporean investment in Johor. There are two questions of interest in this context: whether Singapore is among the largest home country investors in Johor, and whether Singapore invests relatively more in Johor than in other Malaysian states.12 The first question is easier to answer. Singapore has indeed traditionally been the largest investor in Johor (Table 4.10). Since the second half of the 1980s, there have been large inflows of Japanese and Taiwanese investment, but Singapore remains one of the top three investors in Johor. In 1992, Singapore was once again the top investor in Johor with investments of M$954 million or 26.3 per cent of the total, with M$688.4 million from Japan and M$422.2 million from Taiwan (Straits Times, 13 March 1993). Furthermore, these investments in Johor represented two-thirds of the total number of projects by Singapore investors in Malaysia as a whole (Business Times, 25 May 1993). According to the Malaysian Deputy Minister of International Trade and Industry, Mr. Chua Jui Meng, the surge in Singapore investments in Johor has been due to the cross-border flow of investment within the growth triangle framework (Straits Times, 13 March 1993). He also said that Singapore had emerged as Johor’s biggest trading partner in 1991–92. The current concern in Johor (and Malaysia as a whole) is that approved new foreign investment projects declined substantially in 1992 to M$1.3 billion, from MS$7 billion in 1990 and M$4.3 billion in 1991 (Straits Times, 25 May 1993).13 This decline in investor interest was the case, not only with Singapore companies, but also across-the-board; the major reason being the opening of new investment locations in Indonesia, Vietnam and China. The Johor government therefore held a major investment seminar in Singapore late in 1993 to rekindle interest in Johor. To summarise, the proximity of Singapore to Johor does make the concept of twinning sound economic sense. In fact, the tourism and investment data reveal that Singapore does play an important role in the Johor state economy. However, the macroeconomic environment in Malaysia, such as the liberalisation of foreign investment rules in 1986, tax incentives for foreign investors, the fairly well-

109

GROWTH TRIANGLES IN SINGAPORE, MALAYSIA AND ASEAN

Table 4.8 Malaysia: total proposed capital investment in manufacturing projects by state (M$mil.) Total proposed capital investment State

1985

Federal Territory—Kuala Lumpur Federal Territory—Labuan Selangor Darul Ehsan Penang Perak Darul Ridzuan Johore Darul Ta’zim Negeri Sembilan Darul Khusus Malacca Kedah Darul Aman Pahang Darul Makmur Kelantan Darul Na’im Trengganu Darul Iman Perlis Indera Kayangan Sabah Sarawak

% share

1986 % share

1987% share

1988 % share

1989

% share

122.9 1.1 1448.8 345.7 227.0 827.5

2.2 43.9 0.0 – 25.5 1265.1 6.1 175.8 4.0 156.5 14.6 439.9

0.9 0.0 24.5 3.4 3.0 8.5

269.5 12.3 1706.5 635.7 33.5 703.0

6.9 65.8 0.3 12.1 43.4 2245.3 16.2 729.6 0.9 215.2 17.9 1829.5

0.7 0.1 24.7 8.0 2.4 20.1

65.6 – 3950.6 1183.1 295.1 2736.1

0.5 0.0 32.3 9.7 2.4 22.4

158.2 107.4 70.0 314.8 23.6 388.6 57.5 1426.1 167.7

2.8 208.2 1.9 36.5 1.2 32.8 5.5 110.3 0.4 10.4 6.8 50.2 1.0 3.6 25.1 570.3 2.9 2059.7

4.0 0.7 0.6 2.1 0.2 1.0 0.1 11.0 39.9

135.4 117.9 90.1 117.1 2.8 6.2 – 58.3 45.3

3.4 63.3 3.0 1252.7 2.3 269.5 3.0 672.3 0.1 44.0 0.2 158.9 0.0 4.4 1.5 177.8 1.2 1353.5

0.7 13.8 3.0 7.4 0.5 1.7 0.0 2.0 14.9

183.0 602.6 600.2 848.6 25.6 127.1 23.3 635.2 939.3

1.5 4.9 4.9 6.9 0.2 1.0 0.2 5.2 7.7

Total

5686.9

100.0 5163.2

100.0

3933.6

100.0 9093.9

100.0 12215.4

100.0

State

1990

Total proposed capital investment

Federal Territory—Kuala Lumpur 138.4 Federal Territory—Labuan – Selangor Darul Ehsan 4850.5 Penang 1867.2 Perak Darul Ridzuan 877.3 Johore Darul Ta’zim 2090.0 Negeri Sembilan Darul Khusus 1308.0 Malacca 409.1 Kedah Darul Aman 3992.6 Pahang Darul Makmur 517.0 Kelentan Darul Na’im 19.1 Trengganu Darul Iman 10748.0 Perlis Indera Kayangan 4.9 Sabah 285.5 Sarawak Total

Notes:

1060.5 28168.1

% share

0.5 – 17.2 6.6 3.1 7.4

1991* % share

1992 % share 1993 % share

1994

% share

104.3 32.8 4402.4 1525.1 4006.0 4484.6

0.3 0.1 14.3 4.9 13.0 14.6

89.8 **0 5075.1 1096.0 4393.8 2299.8

0.3 48.5 – – 18.3 4345.7 3.9 516.8 15.8 989.4 8.3 1056.0

0.4 149.3 – 467.4 31.6 3429.3 3.8 934.5 7.2 454.5 7.7 1884.4

0.7 2.0 14.9 4.1 2.0 8.2

4.6 1257.0 1.5 6512.2 14.2 560.8 1.8 130.4 0.1 86.1 38.2 6377.7 0.0 130.4 1.0 598.1

4.1 21.1 1.8 0.4 0.3 20.7 0.4 1.9

1680.3 172.5 226.2 811.9 10.2 3026.7 21.1 711.2

6.0 909.9 0.6 376.0 0.8 1069.9 2.9 1541.3 0.0 201.2 10.9 1371.5 0.1 539.9 2.6 293.3

6.6 2.7 7.8 11.2 1.5 10.0 3.9 2.1

1806.4 1525.6 5151.2 561.4 23.5 3882.5 1246.6 690.6

7.9 6.6 22.4 2.4 0.1 16.9 5.4 3.0

2.0

8160.5

3.6

744.1

3.2

100.0 22951.3

100.0

3.8

610.5

100.0 30818.4

100.0 27775.1

29.4

493.3

100.0 13752.7

* Figures from 1991 include expansions/diversificaiton projects granted automatic approval. ** Expansion of capacities or manufacture of additional products not involving additional capital. Sources: Malaysian Industrial Development Authority, Statistics on the Manufacturing Sector in Malaysia; Report on the Performance of the Manufacturing Sector.

110

ASIA’S BORDERLESS ECONOMY

Table 4.9

Malaysia: approvals granted for establishment of manufacturing projects by state Number of approvals

State

1985

Federal Territory—Kuala Lumpur Federal Territory—Labuan Selangor Darul Ehsan Penang Perak Darul Ridzuan Johore Darul Ta’zim Negeri Sembilan Darul Khusus Malacca Kedah Darul Aman Pehang Darul Makmur Kelantan Darul Na’im Trengganu Darul Iman Perlis Indera Kayangan Sabah Sarawak Total

% share

1986

% share

1987

% share

1988

% share

1989

% share

48

7.7

15

3.4

15

4.5

26

3.6

22

2.8

2 173 66 46 102 26

0.3 27.7 10.6 7.4 16.3 4.2

– 155 53 32 80 23

0.0 34.7 11.9 7.2 17.9 5.1

3 105 59 12 82 9

0.9 31.5 17.7 3.6 24.6 2.7

2 238 73 43 183 16

0.3 32.5 10.0 5.9 25.0 2.2

– 211 115 37 211 17

0.0 26.6 14.5 4.7 26.6 2.1

11 21 19 15 12 10 28 46

1.8 3.4 3.0 2.4 1.9 1.6 4.5 7.4

11 12 10 6 11 2 19 18

2.5 2.7 2.2 1.3 2.5 0.4 4.3 4.0

9 10 7 3 2 – 12 5

2.7 3.0 2.1 0.9 0.6 0.0 3.6 1.5

25 45 21 7 10 1 28 14

3.4 6.1 2.9 1.0 1.4 0.1 3.8 1.9

38 33 14 6 8 5 36 39

4.8 4.2 1.8 0.8 1.0 0.6 4.5 4.9

625

100.0

447

100.0

333

100.0

732

100.0

792

100.0

Number of approvals State

1990

Federal Territory—Kuala Lumpur Federal Territory—Labuan Selangor Darul Ehsan Penang Perak Darul Ridzuan Johore Darul Ta’zim Negeri Sembilan Darul Khusus Malacca Kedah Darul Aman Pahang Darul Makmur Kelantan Darul Na’im Trengganu Darul Iman Perlis Indera Kayangan Sabah Sarawak Total

Note: Sources:

% 1991* share

% share

1992

% share

1993

% share

1994

% share

29

3.2

30

3.1

25

2.9

15

2.2

23

2.6

– 237 132 68 204 36

– 26.2 14.6 7.5 22.5 4.0

3 264 125 74 195 36

0.3 27.1 12.8 7.6 20.0 3.7

1 235 119 50 236 39

– 26.9 13.6 5.7 27.0 4.5

– 196 87 44 143 37

– 28.6 12.7 6.4 20.8 5.4

2 233 95 57 193 43

0.2 26.8 10.9 6.6 22.2 4.9

29 65 18 3 5 2 34 44

3.2 7.2 2.0 0.3 0.6 0.2 3.8 4.9

40 73 11 6 18 10 52 36

4.1 7.5 1.1 0.6 1.8 1.0 5.3 3.7

34 42 12 5 13 5 33 25

3.9 4.8 1.4 0.6 1.5 0.6 3.8 2.9

25 45 14 4 7 7 37 25

3.6 6.6 2.0 0.6 1.0 1.0 5.4 3.6

30 60 18 5 29 10 39 33

3.4 6.9 2.1 0.6 3.3 1.1 4.5 3.8

906

100.0

973

100.0

874

99.9

686

100.0

870

100.0

* Figures from 1991 include expansions/diversificaiton projects granted automatic approval. Malaysian Industrial Development Authority, Statistics on the Manufacturing Sector in Malaysia; Report on the Performance of the Manufacturing Sector.

GROWTH TRIANGLES IN SINGAPORE, MALAYSIA AND ASEAN

111

developed infrastructure, and the rapid growth are all equally, if not more, important factors.14 Singapore In essence, the benefits of the JSR Growth Triangle to Singapore concern the enlarging of Singapore’s economic space. First, by offering companies the possibility of locating their labour-intensive production operations nearby instead of in other alternative locations further away, it enhances the attractiveness of Singapore as a location for corporate headquarter activity, such as administration, logistics and procurement, marketing, phototyping and R & D (Lee, 1993). This is in line with the dynamic comparative advantage of Singapore and the movement up the value-added chain, and helps to relieve the pressure on limited labour and land in Singapore. Secondly, in an increasingly interdependent ASEAN, the economic prosperity of Singapore’s neighbours also enhances Singapore’s economic well-being, and vice versa. The rapid growth of both Batam and Johor as a consequence of the growth triangle cooperation has multiplier effects on Singapore. Thirdly, while the water agreement with Johor was signed in 1962 and renewed in 1990, the water agreement with Indonesia, involving the joint development of water resources in central Bintan, is new and an integral component of the cooperation between Indonesia and Singapore. This is an issue of vital national economic and security importance to Singapore. It will also be of benefit to Bintan Island as the building of dams and other infrastructure will be costly. In terms of macroeconomic statistics, there has been no discernible marked reduction in either absolute or relative terms since 1989 or so of the size of the manufacturing sector that can be directly attributed to the establishment of the growth triangle. The manufacturing sector has remained at about 27–8 per cent, of both GDP and total employment since 1988 (see Tables 4.11 and 4.12). This is in contrast with the Hong Kong experience, where there has been a significant downsizing of the manufacturing sector on account of the massive relocation of labour-intensive production processes to the Pearl River Delta region. In Hong Kong, the manufacturing sector shrank from 22.5 per cent of GDP in 1980 to 16.3 per cent in 1990, and the workforce was reduced from 907 000 workers to 629 000 workers between 1980 and 1991, comprising 31 per cent of the 1980 total workforce (Lee, 1992a, 1993). In terms of trade, although Singapore’s trade with Malaysia and with Indonesia (as reflected in the Indonesian trade statistics) has, on average, been growing rapidly since the late 1980s, there is again no discernible effect of the growth triangle on these trade statistics (see Tables 4.13 and 4.14). This is again unlike the case of Hong Kong,

112

ASIA’S BORDERLESS ECONOMY

Table 4.10 Johor: sources of foreign equity in approved projects (M$mil.) Country

1988

% share

1989

% share

1990

% 1991 % 1981–91 % share (Jan–Nov) share share

Japan 49.8 8.9 282.7 41.2 507.7 31.4 221.1 10.4 Taiwan 98.3 17.6 98.9 14.4 212.4 13.1 395.7 18.7 Singapore 101.9 18.3 131.5 19.2 406.9 25.2 294.5 13.9 USA 123.8 22.2 15.6 2.3 145.1 9.0 32.0 1.5 Republic of Korea 7.5 1.4 18.3 2.7 89.2 5.5 307.5 14.5 Total 557.6 100.0 685.7 100.0 1617.6 100.0 2118.3 100.0

1156.6 18.6 1119.5 18.0 1429.6 23.0 360.5 5.8 426.1 6.9 6217.7 100.0

Source: Johor State Economic Development Corporation, Johor Investment Guide 1992.

where the percentages of domestic and re-exported exports, 70 and 30 per cent in 1980 respectively, were reversed by 1991, with China being the most important source of, and market for, re-exports (Lee, 1992a). It could be that it is still too early for the JSR Growth Triangle to have had a significant impact on the Singapore economy. However, several surveys reveal that the redistribution of manufacturing activities offshore has been quite extensive (Lee, 1992a). In a 270respondent survey conducted in January 1992 by the Singapore Manufacturers’ Association, two out of every five manufacturers had either moved or intended to relocate part of their business to neighbouring countries to cope with rising labour costs. A similar survey conducted a year later in February and March 1993 came up with a similar percentage—41.4 per cent of the 323 respondents had moved or intended to move (Straits Times, 30 April 1993). Yeoh, Lau and Funkhouser (1992) report that in a 310-repondent mail questionnaire survey of manufacturing establishments in Singapore, 148 indicated that they already had production facilities outside Singapore, with 45.9 per cent relocating in Johor, 10.8 per cent in Batam and 50.7 per cent elsewhere. It is entirely possible that, at the company or micro level, the Singapore economy is indeed undergoing a major restructing. On the one hand, there is the relocation of labour-intensive manufacturing offshore, not merely to Johor and Batam but also to other locations such as China and other province in Indonesia. On the other hand, this is accompanied by the upgrading of existing activities, or the inflow of more skill-intensive manufacturing or manufacturing-related service activities. The latter move is supplemented in a major way by the continuous inflow of new foreign investment in higher valueadded activities. The aggregation of company data only reveals the net of inflows and outflows and not the extent of inflows and outflows in absolute terms. Some concern has also been expressed

Table 4.11 Singapore: value added by sector at current prices (S$mil.) Industry Agriculture & fishing % share Quarrying % share Manufacturing % share Utilities % share Construction % share Commerce % share Transport & communications % share Financial & business services % share Other services % share Total % share

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1985

322.0 1.2 82.2 0.3 7312.7 28.0 555.0 2.1 1613.2 6.2 5435.1 20.8 3522.2

356.2 1.2 104.7 0.3 8361.5 27.2 477.5 1.6 2163.7 7.1 5840.0 19.0 4063.0

349.1 1.0 128.1 0.4 8153.5 23.8 600.9 1.8 3146.1 9.2 6387.5 18.6 4435.8

330.9 0.9 140.6 0.4 8907.9 23.1 702.7 1.8 4202.5 10.9 6667.4 17.3 4891.9

339.7 0.8 132.2 0.3 9863.4 23.3 773.0 1.8 4943.7 11.7 6885.5 16.3 5222.3

292.3 0.7 111.3 0.3 9184.3 22.1 796.0 1.9 4167.9 10.0 6636.3 15.9 5234.5

244.5 0.6 75.6 0.2 10 304.9 24.8 1075.4 2.6 3289.2 7.9 6608.6 15.9 5332.8

221.5 203.5 190.0 176.6 165.4 170.9 166.7 168.5 206.4 0.5 0.4 0.3 0.2 0.2 0.2 0.2 0.1 0.2 57.3 48.1 58.2 81.7 76.1 38.7 38.3 55.0 59.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 12 209.0 15 46.14 17 346.2 19 393.1 21 191.4 21 236.7 24 524.3 27 674.3 31 635.9 26.5 28.6 28.2 27.2 26.6 24.8 24.7 24.3 24.9 962.4 1155.5 1131.6 1250.0 1280.0 1353.3 1571.1 1740.3 1869.7 2.1 2.1 1.8 1.8 1.6 1.6 1.6 1.5 1.5 3042.4 2996.7 3227.4 3724.0 4799.3 6212.2 6772.4 7975.6 8555.4 6.6 5.6 5.2 5.2 6.0 7.3 6.8 7.0 6.7 7471.5 9123.3 10 418.8 12 764.2 14 081.9 15 093.9 17 933.9 21 167.8 23 651.9 16.2 16.9 16.9 17.9 17.7 17.6 18.1 18.6 18.6 5941.3 6899.3 7987.4 8715.6 9991.3 10 168.7 11 494.5 12 986.3 14 130.0

13.5 4944.0

13.2 6653.2

12.9 7756.6

12.7 8872.0

12.3 12.6 9962.7 10 652.0

12.9 9930.5

12.9 12.8 13.0 12.2 12.5 11.9 11.6 11.4 11.1 11 074.6 12 464.5 14 774.6 17 835.1 19 857.8 22 235.5 26 738.6 30 575.8 34 187.3

19.0 2288.4 8.8

21.7 2670.3 8.7

22.6 3340.7 9.7

23.0 3812.0 9.9

23.5 4238.7 10.0

25.6 4577.3 11.0

23.9 4609.1 11.1

26 074.8 30 690.1 34 298.3 38 527.9 42 361.2 41 651.9 100.0 100.0 100.0 100.0 100.0 100.0

41 4706 100.0

24.1 5022.8 10.9

23.1 5633.1 10.4

24.0 6459.3 10.5

25.0 7358.9 10.3

24.9 8263.9 10.4

26.0 26.9 26.9 26.9 9047.7 10 043.0 11 523.4 12 647.0 10.6 10.1 10.1 10.0

46 002.8 53 985.4 61 593.5 71 299.2 79 707.1 85 557.6 99 282.8 113 867.0 126 942.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Sources: Department of Statistics, Yearbook of Statistics Singapore; Ministry of Industry and Trade, Economic Survey of Singapore.

Table 4.12 Singapore: employed persons aged 15 years and over by industry (’000) Industry

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1985

Agriculture, fishing and quarrying % share Manufacturing % share Utilities % share Construction % share Commerce % share Transport & communications % share Financial & business services % share Other services % share Activities not adequately defined % share

17.9

14.4

15.1

15.1

11.6

11.3

11.5

11.6

6.7

7.2

5.9

4.7

5.5

4.2

5.2

4.6

1.7 322.6 30.1 8.5 0.8 71.1 6.6 228.4 21.3 119.6

1.2 350.4 30.4 7.7 0.7 68.8 6.0 251.0 21.8 131.8

1.2 359.7 29.5 8.5 0.7 77.0 6.3 271.5 22.2 139.0

1.2 347.6 27.8 9.1 0.7 90.0 7.2 284.0 22.7 141.3

0.9 348.1 27.4 9.9 0.8 107.8 8.5 285.8 22.5 132.2

0.9 314.2 25.4 8.2 0.7 110.0 8.9 290.0 23.5 125.1

0.9 306.6 25.2 8.2 0.7 105.2 8.7 280.7 23.1 120.6

0.9 338.7 26.7 7.6 0.6 97.2 7.7 296.7 23.4 128.5

0.5 379.1 28.5 8.4 0.6 89.6 6.7 304.9 22.9 129.2

0.5 403.7 29.0 7.5 0.5 92.2 6.6 318.1 22.8 137.7

0.4 447.4 29.1 6.7 0.4 122.1 7.9 337.5 22.0 146.6

0.3 429.6 28.2 7.1 0.5 99.0 6.5 345.3 22.7 152.9

0.3 434.1 27.5 8.0 0.5 103.2 6.5 356.0 22.6 158.4

0.3 429.5 27.0 7.5 0.5 102.1 6.4 363.6 22.8 166.8

0.3 422.5 25.6 8.5 0.5 108.8 6.6 376.9 22.9 174.7

0.3 408.0 24.0 5.8 0.3 112.7 6.6 343.7 20.2 183.3

11.1 84.0

11.4 88.1

11.4 96.1

11.3 101.8

10.4 109.0

10.1 107.7

9.9 105.6

10.1 112.3

9.7 127.5

9.9 137.2

9.5 167.2

10.0 163.3

10.1 171.4

10.5 173.4

10.6 198.6

10.8 253.5

7.8 220.9 20.6 0.4

7.6 238.4 20.7 3.0

7.9 252.1 20.6 2.1

8.1 260.5 20.8 1.7

8.6 261.7 20.6 3.0

8.7 265.6 21.5 2.6

8.7 274.0 22.6 1.9

8.9 272.6 21.5 1.7

9.6 284.3 21.4 1.9

9.8 289.1 20.7 1.3

10.9 303.5 19.7 0.0

10.7 322.0 21.1 0.3

10.9 339.2 21.5 0.2

10.9 344.1 21.6 0.8

12.0 353.6 21.4 0.5

14.9 378.4 22.2 10.9

Total % share

0.0

0.3

0.2

0.1

0.2

0.2

0.2

0.1

0.1

0.1

0.0

0.0

0.0

0.1

0.0

0.6

1073.4 100.0

1153.6 100.0

1221.1 100.0

1251.1 100.0

1269.1 100.0

1234.7 100.0

1214.3 100.0

1266.9 100.0

1331.6 100.0

1394.0 100.0

1536.9 100.0

1524.2 100.0

1576.0 100.0

1592.0 100.0

1649.3 100.0

1700.9 100.0

Sources: Department of Statistics, Yearbook of Statistics Singapore;

Ministry of Industry and Trade, Economic Survey of Singapore.

Table 4.13 Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Singapore’s trade with Malaysia (S$mil.) Exports % growth

6218.0 6906.6 7858.9 8121.3 8324.2 7786.7 7244.6 8559.6 10 721.1 11 914.8 12 448.5 15 236.1 12 925.4 16 942.0 29 090.00

– 11.1 13.8 3.3 2.5 –6.5 –7.0 18.2 25.3 11.1 4.5 22.4 –15.2 31.1 71.7

% share of total 15.0 15.6 17.7 17.6 16.2 15.5 14.8 14.2 13.6 13.7 13.1 15.0 12.5 14.2 19.7

Domestic exports

% growth

2254.3 2915.9 3618.4 3605.3 3533.4 3773.3 3266.1 3407.0 3986.1 4518.9 5265.2 6819.1 6221.6 8009.0 13 429.0

– 29.3 24.1 –0.4 –2.0 6.8 –13.4 4.3 17.0 13.4 16.5 29.5 -8.8 28.7 67.7

% share of total

Source: Department of Statistics, Yearbook of Statistics Singapore, various years.

8.7 9.9 12.4 12.3 10.7 11.6 10.2 8.7 8.0 8.2 8.4 10.3 9.4 10.6 15.2

Re-exports

% growth

Imports

3963.7 3990.7 4240.5 4516.0 4790.8 4013.4 3978.5 5152.6 6735.0 7395.9 7183.3 8417.0 6703.8 8933.0 15661.0

– 0.7 6.3 6.5 6.1 –16.2 –0.9 29.5 30.7 9.8 –2.9 17.2 –20.4 33.3 75.3

7115.6 7209.5 8065.6 8638.8 9179.7 8301.0 7402.6 9477.4 12 928.7 12 784.0 14 963.0 17 382.5 17 287.2 22 670.0 25 6000.0

% growth % share of total – 1.3 11.9 7.1 6.3 –9.6 –10.8 28.0 36.4 –1.1 17.0 16.2 –0.5 31.1 12.9

13.9 12.4 13.4 14.5 15.0 14.4 13.3 13.9 14.7 13.2 13.6 15.2 14.7 16.5 16.4

Table 4.14 Indonesia’s trade with Singapore (US$mil.) Year

Exports

% growth

% share of total

Imports

% growth

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

2484 2320 3121 3128 2126 1626 1239 1449 1656 1809 1902 2410 3314 3372

– –6.6 34.5 0.2 –32.0 –23.5 –23.8 16.9 14.3 9.2 5.1 26.7 37.5 1.8

11.3 9.7 14.0 14.8 9.7 8.7 8.4 8.4 8.5 8.2 7.4 8.3 9.8 9.2

936 1243 2819 3465 1791 839 969 1358 896 1038 1283 1698 1671 1793

– 32.8 126.8 22.9 –48.3 –53.2 15.5 40.1 –34.0 15.8 23.6 32.3 –1.6 7.3

Source: International Monetary Fund, Direction of Trade Statistics Yearbook.

% share of total 8.6 9.4 16.7 21.2 12.9 8.2 9.0 10.6 6.6 6.3 5.8 6.6 6.1 6.4

Total trade 3420 3563 5940 6593 3917 2465 2208 2807 2552 2847 3185 4108 4985 5165

% growth

% share of total

– 4.2 66.7 11.0 –40.6 –37.1 –10.4 27.1 –9.1 11.6 11.9 29.0 21.3 3.6

10.4 9.6 15.2 17.6 11.0 8.5 8.6 9.4 7.8 7.4 6.7 7.5 8.2 7.5

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117

over the possible consequences for the employment opportunities of those in the workforce with few or no skills. Yet another concern, raised in the larger context of overseas investment from Singapore, is the possibility of hollowing out if care is not taken to link such overseas investment to the Singapore economy (Lee, 1993). These arguments point towards the need to evaluate the effect of the JSR Growth Triangle on the Singapore economy in the more general context of the increasing outflow of investment overseas from Singapore. To summarise, the synergistic effects of the JSR Growth Triangle, based on proximity and economic complementarity, have brought about net economic gains for all parties concerned—Batam Island in Riau, Johor and Singapore. This is particularly the case in terms of the benefits of investment and tourism. Lesson 4: Management of the social and political consequences Rapid growth invariably entails not only structural adjustment in economic terms, but also results in a fundamental reshaping of the social and political order. What is occurring in the JSR Growth Triangle is that the first flush of economic success has given rise to voices questioning the benefits of such growth, particularly in the face of traffic congestion, inflation, housing shortages, and ‘socially undesirable’ activities.15 In the case of Johor, Pangestu et al (1991) categorised these socio-political issues as: •

• •

those at the national level, of Johor vis-à-vis Malaysia, such as political geography, distributional issues, spillover effects, the role of the development of Johor in the development of other parts of Malaysia and potential socio-economic problems; those at the bilateral level, i.e. Johor–Riau relations and Johor– Singapore relations; and those at the multilateral level, in terms of enhancing ASEAN economic cooperation.

Enthusiasm for the JSR Growth Triangle has been more evident on the part of the Indonesian and Singapore governments than on the part of the Malaysian federal government, although the Johor Chief Minister, Tan Sri Muhyiddin Yassin, has been active in promoting the Johor–Singapore linkage. It was only in May 1993 that the Malaysian Trade and Industry Minister, Datuk Seri Rafidah Aziz, announced the federal government’s support of Johor’s participation in the JSR Growth Triangle, and stated that Johor would be given powers to deal with Singapore and Indonesia on Malaysia’s behalf on bilateral matters involving Singapore and Batam (Sunday Times, 23 May 1993).

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ASIA’S BORDERLESS ECONOMY

Similar issues also exist on the Indonesian side (Pangestu, 1991). In addition to these, Ahmad (1992) described the organisational difficulties arising from different governmental agencies being responsible for different Riau islands in the growth triangle. In light of rapid economic growth and the ensuing excess demands placed on infrastructure, such problems are probably inevitable. The fourth lesson is therefore to be prepared for these political and social repercussions and to manage them sensitively and carefully. The distribution of the gains as a result of an overall increase in prosperity is, in many ways, the most tricky part of the economic integration process. Those who gain less or, in the extreme case, lose, will tend to be less in favour of the growth triangle. These could be other provinces which are not involved, nationalist groups which ask whether sovereignty has been eroded and whether their country has been short-changed, or those who observe the social disruptions and ask whether rapid growth is worthwhile. These issues become even more sensitive if they are complicated by ethnic overtones, as is apt to occur in Southeast Asia. It is therefore important to adopt a balanced approach to these concerns, avoiding the twin pitfalls of either ignoring them or conceding to them, lock, stock and barrel. Either of these paths could result in a derailing of the integration process. It would be preferable to continue with the momentum of reducing barriers while at the same time taking concrete measures to alleviate social problems by enhancing the physical and social infrastructure. The management of rapid economic growth is not easy, but is crucial to sustaining the growth momentum. Lesson 5: Start small A fifth lesson is that it is better to be practical and start small, as has occurred in the JSR Growth Triangle, rather than conceive megaprojects which later fail. Once successful, extension of the growth triangle concept to other adjacent areas is entirely possible, even constituting the natural course of events. On the Indonesian side, the cooperative arrangement initially only involved Batam. It has since spread to other Riau islands, in particular Bintan, where active development has already begun on a beachfront resort project as well as an industrial estate. Bulan has agribusinesses. There are plans to develop a multi-million-dollar shipyard and petroleum processing complex on Karimun Island, and to connect the islands of Rempang, Galang and Galang Baru to Batam.

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It is interesting to note the differences in development strategies among the different Riau islands. Batam’s focus is on high-technology product development and relies on highly skilled employees. There are plans to build a port on Batam for ocean-going vessels, to expand the island’s airport and to have Indonesia’s national airline, Garuda, use Batam as a transit point for its European-bound flights. In other words, some observers point our that the long-term development strategy is to make Batam, Rempang and Galang (collectively known as Barelang) a ‘second Singapore’ (Straits Times, 20 June 1993). Bintan, on the other hand, will concentrate on the low-technology end, so that there is complementarity between Batam and Bintan. On the Malaysian side, spread effects are already evident north of Johor; for example, in the neighbouring states of Malacca and Pahang, as it has become difficult to recruit workers in Johor due to rapid increases in demand. A recent institutional development was the formation in April 1993 of a Joint Committee on Business Cooperation, comprising officials and industry representatives from both Malacca and Singapore. Singapore’s Senior Minister of State for Trade and Industry, Mr. Lim Boom Heng, who officiated at the launching, said that there was no reason for the JSR Growth Triangle to stop at Johor, and that it could be extended to Malacca (Business Times, 13 April 1993). With the opening of the North–South Highway in Malaysia and the proposed second Causeway, travelling time between Singapore and Malacca would be considerably reduced. There were 23 Singapore companies which had invested M$87.5 million in 42 projects in Malacca by April 1993. Lesson 6: Growth triangles as a competitive advantage The rationale for growth triangles needs to be seen in international perspective. In the post-Cold War world where economic growth is paramount, governments around the globe are competing for scarce investment dollars. Nations, provinces and even cities are laying out the red carpet and offering attractive packages to prospective investors. In particular, China and Vietnam are viewed in ASEAN as competitors for foreign investment.16 In fact, the decline in foreign investment in both Malaysia and Indonesia in 1992 has been attributed to this increased competition. The growth triangle concept takes this one step further. Just as the intensification of competition is causing business corporations to form strategic alliances which yield synergistic benefits that can improve the bottom line, governments are likewise discovering that cooperation among nation states can enhance their attractiveness as

120

ASIA’S BORDERLESS ECONOMY

locations for investment. Growth triangles therefore constitute an additional competitive advantage for participating nations. Conclusion In conclusion, the experience of the JSR Growth Triangle is best summarised in statements made after the Singapore Minister for Trade and Industry, Mr. Dhanabalan, paid a courtesy call on President Suharto of Indonesia during an official visit to the country (Straits Times, 1 July 1993). He said that he had conveyed Singapore’s ‘great satisfaction’ with the cooperation being undertaken in the Riau islands. He also told reporters that: Just as we took many years to get Batam going, that experience has enabled us to move much faster on Bintan. Subsequently, we will move even faster on Karimun. So as we learn, we can progress even faster. This has been a very good learning experience for us which we can apply in other areas of economic cooperation… The experience in the Riaus is a good one and I think it will come in other areas. So it is one step at a time.

Mr. Dhanabalan further said that he saw the possibility of the extension and replication of the growth triangle to other parts of Indonesia and mentioned that President Suharto pointed to the cooperation between Indonesia and Singapore in the Riau islands as an example which could be emulated by other countries. A number of other proposals for subregional cooperation are being seriously considered in ASEAN. During a visit to Indonesia by the Thai Prime Minister Chuan Leekpai, both he and President Suharto jointly expressed support for Malaysian Prime Minister Mahathir’s proposal of a Northern Growth Triangle comprising northern Malaysia, northern Sumatra and southern Thailand (Straits Times, 28 April 1993). The two leaders saw the proposal as a concrete step towards the realisation of greater intra-ASEAN cooperation. Their endorsement of the concept has served as the green light for a feasibility study on the project to the conducted by the Asian Development Bank. The terms of reference of the study include an examination of resources, competitive advantages, the environment and infrastructure in the provinces concerned, and will include such areas as trade, industry manufacturing, agro-industry, the ASEAN industrial complementation program, tourism, fisheries and energy (Straits Times, 29 April 1993). Another proposal was made during a visit in June 1993 to Singapore of a delegation from Sarawak led by the Chief Minister Tan Sri Abdul Taib Mahmud. The Permanent Secretary of the

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121

Ministry of Industrial Development said that the sate was discussing with Singapore and Batam officials the possibility of enlarging the JSR Growth Triangle to include Sarawak. An alternative proposal was to create a separate arrangement involving Sarawak, Kalimantan and Singapore (Business Times, 26 June 1993). As the forerunner in ASEAN of this approach to subregional cooperation, the JSR Growth Triangle contains a number of valuable lessons for other countries in terms of the conceptualisation, establishment and implementation of similar arrangements. This experience will enable other such proposals to proceed at a faster and smoother pace as a major means of strengthening economic cooperation in, and enhancing the economic competitiveness of, ASEAN. I am indebted to my colleague, Mr. Gwee Wee Chen, Research Officer at IPS, for his able research assistance.

Notes 1 See Article 4 of the Framework Agreement of Enhancing ASEAN Economic Cooperation, reproduced in the Asean Economic Bulletin, March 1992. 2 Much has already been written on the JSR Growth Triangle. Among the earliest publications are Ng and Wong (1991) and Lee (ed.) (1991). The recent papers include the ones presented at the Workshop on Growth Triangles in Asia organised by the Asian Development Bank, 24–6 February 1993; and ones presented at the Workshop on the JSR Growth Triangle organised by the Institute of Southeast Asian Studies on 12 April 1993. 3 The other two categories are subregional zones arising from the joint development of natural resources and infrastructure, such as the proposed Tumen River Delta project, and for common geopolitical interests and geographical proximity, such as the Japan Sea and Yellow Sea subregional zones. 4 For a comparison of subregional zones with export processing zones and free trade areas, see Chia and Lee (1993: pp. 237–8) 5 See Lee (1992a) for a comparison of the JSR Growth Triangle and the Hong Kong–Taiwan–Southern China subregional zone. 6 Brunei joined ASEAN in 1984 when it gained independence. See, for example, Sandhu, et al (1992) for more details on ASEAN and ASEAN economic cooperation. 7 See Imada and Naya, eds (1992) for a discussion of the proposed ASEAN Free Trade Area. 8 See Chia and Lee (1993) for a comparison of subregional zones and free trade areas.

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ASIA’S BORDERLESS ECONOMY

9 This condition is different from that applicable to the rest of Indonesia, where divestment must reach at least 51 per cent within 15 years. See Pangestu (1991), and Chia and Lee (1993). 10 The developers/names of the industrial estates are: PT Kabil Indonusa Estate; PT Suar International Development of Kuang Hwa Industrial Park; Thomas Technology Park and PT Kara Primanusa; Batam Industrial Park; PT Seafront Industrial City; PT Spinindo Mitradaya Batam; PT Trisatya Usaha; and Kabil Industrial Estate/Tg Uncang Industrial Estate, by PT Putri Selaka Kencana (Batam Industrial Development Authority, development data as at December 1992). 11 This is in contrast with Batam Island. 12 The second question could be answered if data on Singaporean investment were available by state. The author has not been able to obtain such data. 13 However, the first quarter of 1993 saw a renewed increase in investment from Singapore in Malaysia, particularly by smaller companies, compared to the first quarter of 1992 (Business Times, 25 May 1993). It is, however, too soon to tell whether this will be true for the entire year. 14 Again, as in the case of Batam, the more micro issues such as the extent of technology transfer are relatively unexplored territory, upon which very little is known. 15 See, for example, the proceedings of the Institute of Southeast Asian Studies Workshop on the JSR Growth Triangle in April 1993. See also Parsonage (1992). 16 To a lesser extent, Mexico in the North American Free Trade Area has also been viewed as a third possible competitor.

References Ahmad, Mubariq (1992) ‘Economic Cooperation in Southern Growth Triangle: An Indonesian Perspective’, paper presented at the Conference on Regional Cooperation and Growth Triangles in ASEAN, organised by the National University of Singapore, 23–4 April 1992. Chia, Siow Yue and Lee Tsao Yuan (1993) ‘Subregional Economic Zones: A New Motive Force in Asia-Pacific Development’, in C. Fred Bergsten and Marcus Noland (eds.) Pacific Dynamism and the International Economic System, Institute for International Economics; Washington DC, pp. 225–69. Habibie, B.J (1992) ‘Technology and the Singapore–Johor–Riau Growth Triangle’, speech delivered at the Tripartite Meeting and Seminar on Economic Development in the Growth Triangle and its Environment Impact, 8 May, Batam. Imada, Pearl and Seiji Naya (eds) (1992) AFTA: The Way Ahead, Singapore: Institute of Southeast Asian Studies.

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Lee, Tsao Yuan (ed) (1991) Growth Triangle: The Johor–Singapore–Riau Experience, Singapore: Institute of Southeast Asian Studies. Lee, Tsao Yuan (1992a) ‘Regional Economic Zones in the Asia–Pacific: An Overview’, paper presented at the Conference on Regional Cooperation and Growth Triangles in ASEAN, organised by the National University of Singapore, 23–4 April 1992. ——(1992b) ‘Growth Triangles in ASEAN’, PITO Economic Briefs, no. 10, East–West Center: Honolulu. ——(1992c) ‘The Johor–Singapore—Riau Growth Triangle: Effect of Economic Integration’, paper presented at the International Conference on Managing the Mega-Urban Regions of ASEAN Countries: policy Challenges and Responses, organised by the Canadian Universities Consortium and the Asian Institute of Technology, 30 November–3 December 1992, Bangkok. ——(1993) ‘Overseas Direct Investments by Singapore Manufacturing Companies: Implications for the Singapore Economy’, confidential report; also background paper for the Regionalisation Forum organised by the Economic Development Board, 20–2 May 1993, Singapore. McGee, Terry G. and Scott MacLeod (1992) ‘Emerging Extended Metropolitan Regions in the Asian–Pacific Urban System: A Case Study of the Singapore–Johor–Riau Growth Triangle’, paper presented at the Workshop on the Asian Pacific Urban System: Towards the 21st Century, held at the Chinese University of Hong Kong, 11–13 February, Hong Kong. Ng, Chee Yuen and Wong Poh Kam (1991) ‘The Growth Triangle—A Market-Driven Response’, Asia Club Papers 2, Asia Club: Tokyo, pp. 123–52. Pangestu, Marie (1991) ‘An Indonesian Perspective’, in Lee Tsao Yuan (ed.) Growth Triangle: The Johor–Singapore–Riau Experience, Institute of Southeast Asian Studies and Institute of Policy Studies: Singapore, pp. 75– 116. Pangestu, Marie, et al (1991) ‘A Malaysian Perspective’, in Lee Tsao Yuan (ed.) Growth Triangle: The Johor–Singapore–Riau Experience, Institute of Southeast Asian Studies and Institute of Policy Studies: Singapore, pp. 37–74. Parsonage, James (1992) ‘South–East Asia’s Growth Triangle—An Emergent Transnational Metropolis? Problems and Prospects’, paper presented at the International Conference on Managing the Mega-Urban Regions of ASEAN Countries: Policy Challenges and Responses, organised by the Canadian Universities Consortium and the Asian Institute of Technology, 30 November–3 December 1992, Bangkok. Sandhu, K.S., et al (1992) The ASEAN Reader, Institute of Southeast Asian Studies: Singapore. Scalapino, Robert A. (1992) ‘The United States and Asia: Future Prospects’, Foreign Affairs, Winter 1991/92, pp. 19–40. Yeoh, Caroline, Lau Geok Theng and G. Ray Funkhouser (1992) ‘Summary Report: Business Trends in the Growth Triangle’, Faculty of Business Administration, National University of Singapore: Singapore (mimeo).

Appendix to chapter 4: The Riau Islands: development in progress Junko Fukuda

The JSR Growth Triangle’s rapid development is conspicuous even for the fast-growing region of Southeast Asia. The aim of the growth triangle concept was announced in December 1989 by the then Deputy Prime Minister of Singapore, Goh Chok Tong. At the time, Deputy Prime Minister Goh laid out a cooperative plan to develop the triangular region of Singapore, Malaysia’s Johor State, and Indonesia’s Riau Province into a major industrial, trade, and tourism zone. Although, at the time of the announcement, the pace of influx of companies into Johor from Singapore was increasing, the Malaysian federal government was relatively unenthusiastic about this regional development. In Indonesia, economic development of the Riau Province has never been as a priority. This may be due to the region’s distance from the capital city of Jakarta. Nonetheless, in August 1989, five months prior to Mr. Goh’s announcement, Senior Minister Lee Kuan Yew (then the Prime Minister of Singapore) and Indonesian President Suharto reached an agreement to begin joint development of the Riau Islands. A year later, this development started to gather pace when the two countries signed a bilateral agreement (see Table 4A.1). Five year later, the growth triangle concept has gained many advocates. Much of this support is due to the successful development of the Riau Province’s Batam Island and the subsequent steady development of the islands of Bintan and Karimun. 124

THE RIAU ISLANDS

125

Table 4A.1 Development history of Riau Islands Period of development by Indonesia 1971 1972 1977 1978 1979

Establishment of Batam Island Development Agency (BIDA) Batam Island started master-planning of development Comprehensive industrial development plan Designation of the entire land as a bonded zone Decision to prepare development plan; preparation of comprehensive development plan by 2006

Period of joint Singapore–Indonesia development Oct 1989

Dec 1989 Jan 1990

Feb 1990 Aug 1990 1991 Apr 1992 Dec 1994

Conference between President Suharto (Indonesia) and former Premier Lee Kuan Yew (Singapore); easing of foreign investment regulation (100 per cent ownership approved) The growth triangle concept announced by Premier (then Deputy Premier) Goh Chok Tong (Singapore) A joint Singapore–Indonesia venture for construction of the BIP (Batamindo Industrial Park) was established. The partners were Singapore: Batamindo Industrial Management (BIM) and Indonesia: Batamindo Investment Corporation (BIC) Ground-breaking ceremony for BIP Signing of the economic cooperation and investment protection agreement by Indonesia and Singapore; topping-out ceremony for BIP Establishment of Bintan Resort Management; ground-breaking ceremony for Bintan Resort; BIP and Water Resources Development Project Opening ceremony of BIP; signing of memorandum of understanding for the Southlinks Country Club development Partial opening of Bintan resort; signing of memorandum of understanding by trade ministers of Singapore, Malaysia and Indonesia

Source: Prepared by Nomura Research Institute Singapore from Batamindo Industrial Management (BIM) and press reports.

Shared development of the Riau islands Batam, Bintan, and the four Karimun islands each have different individual strengths which ensure that their development is complementary rather than competitive in nature (see Tables 4A.2, 4A.3). Batam Island, which lies nearest to Singapore, attracts primarily nonpollutant electronic industries such as consumer electronic product and part manufacturing. Bintan Island will become the base for environmentally friendly light industries as well as for tourism and leisure facilities that take advantage of the largely unexplored natural beauty of the island. The four Karimun islands, with their easy access to international shipping lanes in the Straits of Malacca, aim to build a billion-dollar marine complex and oil terminal.

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Table 4A.2 Comparison of Riau Islands

Direction and distance from Singapore Hours from Singapore Area (sq. km) Development schedule of major projects Industries invited to industrial parks Note:

Batam

Bintan

Karimun

S 20km

SE 45km

SW 40km

45 min. 415 1989–95

60 min. (45 min.) 1030 1991–96

60 min. 133 1994–97

Non-pollutant electronic industries

Environment-friendly Petrochemical; light industries, ship-building, leisure repair

Hours from Singapore are from the World Trade Centre (WTC). Parenthesized figure are those from Tanah Merah Ferry Terminal.

As an aid to the joint development of the Riau islands, Singapore’s expertise and contacts are being fully utilized through a management and operating company’s integrated service system. Indonesia’s Salim Group is responsible for acting as a liaison with the Indonesian government and for recruiting workers. The average personnel package cost for this joint development is S$260–S$280 (approximately US$180) per worker for a 40-hour work week. This includes basic wages, bonuses, accommodation, recruitment expenses, medical examination charges, work clothing, workers accident compensation insurance, and return air tickets. This is about one-third of the cost of an equally skilled worker employed in Singapore. Other incentives for companies to participate in the project include Batam’s and the Bintan Industrial Estate’s status as tax free zones. Additionally, Indonesia’s exports enjoy trade privileges under the Generalized System of Preferences (GSP), which are recognized by the European Union and the United States. The development of Batam, Bintan, and Karimun is reviewed below. Advanced development of Batam Island The joint development of the Batamindo Industrial Park (BIP) on Batam Island, located roughly 20 kilometers south of Singapore, had a head start over the other development projects in the Riau Islands (see Tables 4A.3, 4A.4). (Initially, the development was known as Batam Industrial Park but in order to establish a brand name, it was changed to ‘Batamindo’ which is a composite of Batam and the first two syllables of Indonesia.) Investment in the project is also coming from Indonesia’s Salim Group as well as from government-affiliated

Table 4A.3 List of major development projects, Riau Islands Batam Island Project

Area, outline of development

Batamindo Industral Park (BIP)

Expected time of completion

320ha; order-made factory site Phase and rental factory facilities, Phase clinic, infrastructure (power generation, telecommunications) in the Muka Kuning area Bintan Beach International 230ha; golf course (18h 2-course) Phase Resort and condominium & bungalows Phase next to Ladi reservoir in the Sekupang area

Master developer/master planner

Investing companies

Investment value

I: mid-1995; Batamindo investment II: end of 1995 Corporation (BIC), Batamindo Industrial Management (BIM)

Salim Group, Singapore Phase I: S$155 Technologies Industrial Corp. (STIC). million Jurong Environmental Engineering (JEE)

I: mid-1995; II: mid-1997

Batamindo Executive Village

Batamindo Investment Corporation S$110 million (Salim, STIC, Jee). P.T. Herwido Rintis (Salim Group), Sumitomo Rubber, Sumitomo Electric, Obayashi, Pico Batam Development

Master developer/master planner

Investing companies

Bintan Resort Corporation (BRC), Bintan Resort Management (BRM)

Salim Group, The Riau Admin., S$3.5 billion Indonesian Navy Foundation, STIC, DBS, OCBC, OUB, UOB Equity Investment, SSG, Tropical Resorts, KM Bincorp Investments ditto S$130 million for infrastructure; S$13 million for resorts

Source: Batamindo Industrial Management (BIM) Bintan Island Project

Area, outline of development

Bintan Beach International 23 000 ha; Resort

BBIR Phase I

Bintan Lagoon Golf and Beach Resort

Expected time of completion 20 years ahead

18 mw power generator, reservoir, Oct. 1994 telecommunications, ferry terminal at Teluk Sebong beaches, marine sports centre, seafood restaurant 300 ha; 2 golf course (18 holes Phase I: each), hotel (400 rooms), 100 end of 1995 large delux bungalows

ditto

SAFE Enterprises (STIC’s subsidiary)

Kintetsu Group, Salim Group, SSL, SAFE, Enterprise, Seletar Investment (Temasek Holdings’ subsidiary)

Investment value

S$200 million

Bintan Island (continued) SSL-KMP Resort

Shangrila Bintan Banyan Tree Bintan Resort Bintan Industrial Estate (BIE)

435 ha; Club Mediterranean (20 ha) first-class hotel, bungalows, golf courses, golf school, marine sports, etc. 400-room hotel

Club Mediterranean (late in 1996), Phase I: 1997

Straits-KMP

SSL, Salim Group

S$90 million

1996

Salim Group

n.a.

240 ha; pool, bungalows, hotel, golf courses, tennis courts 4000 ha; plant facilities, clinic, infrastructure (ferry terminal, piers, roads)

Phase I: June 1996; Phase II: 1996

Shangril-La Hotel International, Salim Tropical Resort (Wah Chang Group)

DBS Land, Singapore Leisure, Salim

S$75 million

Operation started in July 1994

Bintan Inti Industrial Estate (BIIE)

Salim Group, STIC, JEF

Phase I: S$200 million

Master developer/master planner

Investing companies

Investment value

Karimun Industrial Management Karimun Indojaya

Salim Group, Sembawang, JEE Salim (60%), Sembawang (25%), JEE (10%) STIC (5%)

S$500 million

ditto

ditto

S$150 million

Karimun Oil Terminal

Salim (45%), Sembawang (40%), JEE (5%) Kuo Oil (10%)

S$60 million

Source: Bintan Inti Industrial Estate (BIIE), Bintan Resort Management (BRM). Karimun islands Project Karimun Industrial Complex (KIC) Marine project Phase I

Areas, outline of development

Expected time of completion

3600 ha; ship building & ship repair, oil terminal 1000 ha, reclamation, marine Mid-1995 complex (ship building and repair, engineering), water treatment plant, telecommunications Marine project Phase II 300 ha, reclamation, plants, for light industries Oil project Phase I 120 ha; fundamental work for end of 1995 oil storage tanks and refining facilities Oil project Phase II Construction of oil refinery and strange tanks Oil project Phase III Doubling of oil refining capacity

Source: Prepared by Nomura Research Institute from Karimum Indojaya Corporation data and press reports.

S$100 million

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Table 4A.4 Number of companies operating in Batamindo Industrial Park Nationality of company

Number confirmed

Japan Singapore Europe US Others Total

40 23 10 5 4 82

Share (%) 58.8 28.0 12.2 6.1 4.9 100.0

Number in operation 33 22 9 5 4 73

Share (%) 45.2 30.1 12.3 6.8 5.5 100.0

Number of employees 19 133 5470 6037 3699 3689 38 028

Share (%) 50.3 14.4 15.9 9.7 9.7 100.0

Note:

Figures are of October 1994. Locally incorporated foreign companies are classified by their countries of origin. Source: Batamindo Industrial Park.

companies from Singapore, including Singapore Technologies Industrial Corporation (STIC) and Jurong Environmental Engineering (JEE). This Singapore faction handled the master plan for infrastructure construction. This plan included the development of power, water service, telecommunications, and drainage and sewage systems. It also handled the design and construction of standard factories, workers’ quarters, recreational facilities and a town center. While the groundbreaking ceremony only took place in February 1990, the first tenant was ready for operation by January of the following year. However, it was not until the completion of phase 1 in April 1992 that the BIP was officially opened. Since then, the number of tenants has increased from 29 companies (including nine Japanese companies) to 73 companies. The number of workers has expanded by 6.3 times from 6000 to 38 000. In step with the progress of this project, visitor arrivals to the island have increased sharply from 84 000 in 1985 to 947 000 in 1995. The 1991 adoption of ‘smart cards’ or electronic passports has greatly simplified customs processing for commuting workers. Here, the BIP project is reviewed in terms of personnel cost, infrastructure, labour force, and capital ratio. Personnel cost Assuming Singapore’s personnel cost to be 100, Jakarta’s stands at 15 and Batam’s at 28. Indonesian wages are coming up as a result of frequent increases in the minimum wage, but this increase has been offset by the rupiah’s depreciation against the Singapore dollar. Thus, the relative gap between Indonesian and Singaporean wages remains almost unchanged.

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Infrastructure Power supplies have been expanded to meet the anticipated growth in demand. Although some power supply problems currently occur on Batam Island, four generators with a total capacity of 80.5 megawatts will be constructed to ensure that such problems are overcome and will provide more than enough power for the BIP. Traffic conditions on the island have improved with the widening of roads from two lanes to four. Labour force Initially, workers were employed though a recruitment company, a Salim Group subsidiary, on a two-year contract basis. However, the influx of job seekers from other regions of Indonesia into Batam has made direct employment possible. Direct local recruitment saves companies the expense of accommodation and air fares. Companies are also adopting their own evaluation methods and switching to permanent employment contracts in an effort to retain staff beyond their initial two-year commitment. BIP, for its part, is endeavouring to secure high-quality labour by constructing dormitories for married workers. Foreign capital ratio The approved period of 100 per cent foreign ownership has gradually increased from the initial level of five years. Currently, foreign ownership is permitted on the condition that a part (even 1 per cent) of the equity is transferred to an Indonesian partner in the sixteenth year of the operation. The easing of foreign investment restrictions by the Indonesian government is expected to have a positive effect on the project. Of the companies operating in the BIP, 49 per cent are Japanese companies (see Table 4A.5). While most of these companies initially set up their production or sales bases in Singapore, the majority have shifted part or all of their Singapore bases to the BIP to raise their level of competitiveness. They also plan to expand production capacity in an effort to better tap the populous and increasingly wealthy local Indonesian market. Decisions behind the development and location of BIP were no doubt based on studies of Singapore’s highly regarded industrial parks as well as on the island’s proximity to Singapore and its lower labour costs. The well-established infrastructure—including power, water

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Table 4A.5 Japanese companies operating in Batamindo Industrial Park (October 1994) Company Alteco Chemical Asahi Electronics Asia Matsushita Kyocera Chiyoda Denshi EX Foster Electric Fujitec Giken Precision Japan Medical Supply (JMS) Japan Servo Moto (JSM) Japan Solderless Terminal (JST) Kumagai Matsushita Electronic Components Neat Co. Ltd. Nisshin Kogyo Oki Electric Cable Rubycon Sanipak Sanyo Sanshu Molding Seiko Epson Shimano Shintomi Singapore Oil Seal Sumitomo Automobile Products Sumitomo Electric Takamori Singapore TEAC TEC Teikoku Tsushin (TTK) Vitec Yokogawa

Products

Start

Packaging for ‘Superglue’ Phone answering devices, small calculators; plastic injection Battery assembly Phone components Surface mounting of electronics devices Jack sockets and boards Audio speakers Elevators, escalators Tape recorders, floppy disk devices (FDD) Disposable medical devices Stepping motors, icemakers Connectors and terminals

June 1995 June 1994

DC brushless motor for VCR/FDD Electronic components for speakers Plastic components/moulds Electric gun assembly Fine cable for telecommunications Capacitors Disposable plastic bags Rechargeable batteries Metal pressing Watch casings, components Bicycle parts, fishing rods VCR, car audio assembly Oil seals Automobile wire harness Gold-plated lead wire Metal stamping parts Floppy disk devices Printer heads, power supply Variable resistors, meters PCB assembly Measurement meters

June 1995 Nov. 1982 Dec. 1991

Employees 42 506 360 1258 85

June 1991 March 1991 Aug. 1992 July 1991

588 1013 322 1050

June 1994 Jan. 1994 July 1994

637 450 75

Nov. 1992

775

June 1995

769

June 1995 Feb. 1995

29 181 50

July 1993 Sept 1991 Apr. 1992

337 197 552 43 717 3097 1833 635 1005

June 1991 July 1991 Aug. 1991 March 1993 Dec. 1990 June 1995 June 1994 June 1994 July 1992 June 1994

604 40 990 620 107 20 150

Source: Batamindo Industrial Park.

service, and telecommunications—and the availability of plant facilities significantly shortened the time between the initial planning stage and the start of operations. Companies operating in the BIP are satisfied with these facts, as well as with the 99–100 per cent staff

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attendance rate which ensures stable and consistent production. However, the limited supply of upper-middle management staff on the island forces many companies to keep their parts procurement, production-support engineering, and product marketing operations in Singapore. BIP developer Batamindo has launched a condominium and bungalow development to provide amenities for business executives in BIP. Condominiums from phase 1 of this project have sold out. BIP is also developing a championship golf course (Southlinks Country Club) in cooperation with a Japanese company. Batamindo plans to develop the area into a well-equipped functional community by improving the amenities. The development of the island of Batam has been remarkable. Island-wide efforts continue to be focused on the upgrading and expansion of the airport and harbour facilities. Additionally, further improvement of infrastructure such as roads and the power and water supply has been planned. Environment-oriented development of Bintan Bintan Island, located about 60 kilometers south–east of Singapore, is the largest of the 1304 Riau islands and is approximately twice the size of Singapore. The Bintan Industrial Estate (BIE), which is being constructed in the Lobam area on the north–west part of the island, is targeted at such industries as textiles, apparel, furniture, wood products, toys, plastic products, packaging, food processing, and footwear. Investment is coming from three companies that have successfully invested in the BIP: Indonesia’s Salim Group, Singapore Technologies Industrial Corporation (STIC), and Jurong Environmental Engineering (JEE). With construction of the site beginning in March 1993 and the first plant coming on line sixteen months later in July 1994, phase 1 of the work was completed rapidly. Completed works include plant buildings, plant sites, workers’ quarters, and clinics. The location of ferry terminal at the entrance to the estate greatly enhances its ability to transport both people and goods. Products are all shipped to Singapore and then exported from there to other parts of the world. In order to speed up customs formalities, the state also plans to introduce the smart-card system which is successfully being used by the BIP. Sixteen companies have already confirmed their investment in the BIE. Five Singapore textile and apparel companies are already in operation there. They have paved the way for a rapid increase in investment and employment.

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In order to develop tourism, another mainstay of the project, resorts are being constructed on a 23 000 hectare area in the northern part of Bintan Island. The 20-year plan, which is subject to strict environmental regulations, aims to attract tourists not only from Singapore but also from other regional and long-haul destinations. The ferry service from Tanah Merah Ferry Terminal at Changi in Singapore not only offers modern comforts and facilities but also shortens the travel time to Bintan Island to 45 minutes. This can be compared with the one-hour-plus trip which was previously available from the World Trade Center in Singapore. The completion of customs formalities on the ferry further adds to the tourists convenience. Once these projects are completed, the increased visitor arrivals to the planned beach resorts on Bintan should benefit both the Indonesian Directorate General of Tourism and Singapore’s Tourist Promotion Board. Longer stays are also anticipated for both Bintan and Singapore. The Bintan resort has a total of 26 development areas. An 18megawatt power station, a reservoir, ferry terminal, beaches, a marine sports club, and a seafood restaurant began operation in October 1994. First-class hotels and golf resorts with bungalows designed for long-staying guests will be completed by 1996. These various projects are being developed by companies such as Japan’s Kintetsu Group, France’s Club Mediterranean, and a contingent of Singapore-based corporations. Other big projects including a water theme park developed by a US affiliated company are under construction. The longterm goal for the entire development is to create a comprehensive leisure center in Southeast Asia. In addition to industrial and leisure developments, a water resource project involving Singapore’s Public Utilities Board (PUB) is also under way. The current supply of water from Singapore’s reservoirs does not fully meet the per capita annual consumption of 125 cubic meters (including water for industrial use). Therefore, this project is designed to meet future growth in demand. Four Karimun islands—specializing in ship and oil industries The four Karimun islands—Karimun Besar, Karimun Kechil, Pulau Keebil and Pulau Mudu—are easily accessible from the Straits of Malacca, a vital link between the Far and Middle East. The seas around the islands have a depth of 15–30 meters, sufficient for the anchoring of big ships. These assets are the basis for a plan to construct a shipyard and an oil base. Singapore’s Sembawang Group will handle the management of the Karimun Industrial Complex

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(KIC), providing one-stop facilities for foreign companies participating in Karimun. Fundamental to the project will be a shipyard with the ability to accommodate oil tankers and container ships with a tonnage of up to 30 000 tons. Shipyard services commenced with the completion of phase I in mid-1995. A few foreign companies are considering participation in the plan. The proximity of the four islands (about 40 kilometers) to an offshore Singapore petrochemical complex will be taken advantage of through the construction of an oil terminal. Phase I of this plan began in 1995 and included reclamation work and the construction of oil storage tanks and associated facilities. When completed, the Karimun oil refinery will provide a daily refining capacity of 120 000 barrels. Singapore has the world’s third largest oil refining base with a daily capacity of one million barrels. There are plans to invite petrochemical companies to participate in a complex which will be constructed on reclaimed land off the Jurong area and seven neighbouring islands. A number of companies, including Petrochemical Corporation of Singapore (owned by Sumitomo Chemical and other Japanese companies) are participating in the project. The four Karimun islands are expected to play a role in this development as a comprehensive (downstream and upstream) oil and chemical supply base. They will construct plant sites so they can be ready for future growth in demand and future increases in operations. Expanding concept of regional cooperation The growth triangle concept was officially confirmed in December 1994 with the signing of a memorandum of understanding by the ministers of Singapore, Malaysia, and Indonesia. The fact that the signing was proposed by Malaysia signifies that not only has the Malaysian government recognized the smooth progress of this economic cooperation, but that it is keen to work with the Johor state government to realize the most from the concept. The state government intends to reinforce its cooperative structure with Singapore and the Riau islands by expanding facilities for telecommunications and information exchange. In the same month, Indonesia, Malaysia, and Thailand concluded a US$1.3 billion agreement for the development of infrastructure (telecommunications and power generation) for the ‘Northern Growth Triangle’ involving southern Thailand, northern Sumatra in Indonesia and Penang in Malaysia. President Fidel Ramos of the Philippines—which is a member of the ‘East ASEAN Growth Area’ (EAGA) comprising Mindanao in the

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Philippines, Sabah and Sarawak in Malaysia, the Moluccas, Sulawesi, East and West Kalimantan in Indonesia, and Brunei—has requested Singapore’s active participation in this development project. The request was motivated by a desire to tap the expertise gained from the development of the Riau Islands and to bring about closer bilateral economic cooperation. The attitude of ‘complementary use of mutual advantages for shared growth’ has successfully sustained the growth triangle concept. The application of this concept to other parts of ASEAN and the reinforcement of regional divisions of labour should accelerate the overall development of this part of the world.

5

The Indochina Economic Zone Osamu Yasuda and C.H. Kwan

With the ending of the Cold War, the socialist countries in Indochina are fast emerging as a new frontier for the Asian economies. Economic cooperation centering on the Mekong River is leading to the formation of a subregional economic zone comprising Thailand, Vietnam, Laos, Cambodia, Myanmar and Yunnan Province of China. This chapter first traces the political and economic transformation of the Indochinese states over the last twenty years by noting that the domino effect of communist expansion has given way to the reverse domino effect of transition to market economies. This is followed by a summary of recent moves in economic cooperation in the ‘Greater Mekong Subregion’ under the initiative of the Asian Development Bank. The reverse domino effect in Indochina The international environment surrounding the Indochinese states has changed dramatically in the 1990s. The fear of domination by communism has subsided and the transition of Vietnam, Laos, Cambodia and Myanmar to market economies is gathering momentum. The inflow of foreign direct investment and resumption of official development assistance is paving the way to an economic takeoff in these Indochinese states. In the 1960s, when the Cold War was at its height, it was widely believed that should Vietnam turn red, the rest of Indochina, if not the whole of Southeast Asia, would tumble to communism one country after another. This so-called ‘domino theory’ formed the 136

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theoretical basis for the United States’ military intervention in Indochina. In 1975, it seemed to be only a matter of time before the domino theory would be fully realized. In April, the government of Democratic Kampuchea (the Pol Pot regime) was established in Cambodia, followed by the fall of Saigon to the hands of the communists in Vietnam. In November, King Sri Savang Vatthana of Laos abdicated from the throne and the People’s Republic of Laos was proclaimed. Although the fierce war with the United States was finally over, political and economic turmoil continued to plague these three Indochinese states. In the first ten years under communist rule Vietnam, Laos and Cambodia suffered economic difficulties caused by the inefficiency of the socialist system and isolation from the West. Economic growth stagnated while inflation reached double-digit levels. After the Vietnam War, the United States imposed a trade embargo on Vietnam and international financial institutions also stopped their support to the country. Many people fled the country, and the South China Sea was flooded with Vietnamese boat people. In 1979 Vietnam invaded Cambodia, rapidly worsening its relations with other countries; two months later, a border dispute with China escalated into the Sino–Vietnam war. On the economic front, the Vietnamese government’s attempt to implement a centrally planned system resulted in economic difficulties in the late 1970s. During the 1976–80 Five-Year Plan, annual economic growth averaged only 0.4 per cent, and with the population growing at 2.2 per cent a year, per capita income actually declined. In Cambodia, the Pol Pot regime implemented drastic measures to transform the country into a socialist society. The use of money was forbidden and city dwellers were forced to move to rural areas to build a socialist economy based on agriculture. The new government had a strong antipathy towards the former government (the Lon Nol faction) and intellectuals; massive programs to eliminate and reeducate these people turned the nation into a killing field. Over one million people are thought to have been killed or died of hunger, disease and overwork. The Pol Pot regime was overturned by Vietnamese forces in January 1979. Vietnam then supported the Heng Samrin faction to form the People’s Republic of Kampuchea. Under the new government, Pol Pot’s extreme form of socialist policy was reversed, but the country continued to suffer isolation from the international community. No government except those of the Eastern Bloc countries recognized this regime on the grounds that it was a government established by Vietnam. In November 1979, the United Nations General Assembly passed a resolution calling for the withdrawal of Vietnamese forces from Cambodia. However, guerrilla warfare be-

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tween the Vietnam-supported regime and the ousted Pol Pot faction lingered in the countryside. In Laos, the revolution in 1975 was also followed by a period of disorder. There was an exodus of intellectuals including many highranking officials of the royal government and businessmen including ethnic Thai and Chinese. On the economic front, the banking sector and all large industrial plants were nationalized and collectivization in the agriculture sector was promoted. For most of the following decade, the government sought to establish an economic system of central planning, but economic performance failed to improve. All three countries tried to overcome their difficulties by strengthening their ties with the Easter–Bloc countries. However, despite assistance from the socialist countries, economic conditions remained lackluster. The situation was aggravated by the global decline of communism. By the early 1990s, with the collapse of communist regimes in the Soviet Union and Eastern Europe, the three socialist countries in Indochina were no longer able to depend on assistance from countries associated with the Council for Mutual Economic Assistance (CMEA). In Myanmar (formerly Burma), the government had pursued its own brand of socialism since General Ne Win’s military coup in 1962. Burmese socialism was characterized by nationalization of production capital, full state control of the economy and self-reliance. However, management of state enterprises in the industrial sector was inefficient and in the agricultural sector farmers lost incentive to increase output. Moreover, in the 1980s, the country was badly affected by the deterioration of its balance of payments due to lower commodity prices. This, coupled with the political confusion caused by major student demonstrations and democratization movements, led to negative economic growth in 1987–88. It was against this background that the State Law and Order Restoration Council (SLORC) took power in 1988 through a coup led by Defence Minister Saw Maung. In contrast with the plight of the socialist countries in Indochina, neighbouring countries have been gaining economic strength. Following the newly industrializing economies (NIEs), countries affiliated with the Association of Southeast Asian Nations (ASEAN) are fast transforming themselves into middle-income countries. Much progress has also been made in China in revitalizing its economy through partially introducing the market mechanism in organizing economic activities. Recognition of this new reality prompted the socialist countries in Indochina to change course. On the international front, the socialist countries sought to improve their relations with ASEAN and

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the industrial countries. Vietnam completed the withdrawal of its forces from Cambodia in September 1989. This paved the way for progress in peace talks and the signing of the October 1991 UNsponsored peace agreement in Paris by Cambodia’s four warring factions. On the domestic front, Vietnam officially adopted the doctrine of Doi Moi (or renovation) while Laos introduced Cintanakaan Mai (or New Economic Mechanism) in 1986. In Cambodia, the return of peace has raised hopes for reconstruction of its war-torn economy with assistance from the West. In Myanmar, the military regime that took power in 1988 abandoned Burmese socialism in favour of a new approach based on the market mechanism. A reverse domino effect of de-socialism is sweeping through Indochina. Economic reform in the Indochinese states The economic reforms and open door policies now taking place in the Indochinese states have followed closely the Chinese model.1 On the external front, the focus has been on promoting the inflow of foreign direct investment and exports; on the domestic front, there has been a shift from reliance on central planning to the market mechanism in organizing economic activity. Although the transition process is far from completed, macroeconomic stability in these countries has been achieved and their investment environment has improved significantly (see Table 5.1). Vietnam Vietnam’s attempt to rebuild its economy in 1976 under the Second Five-Year Plan (1976–80) turned out to be a failure due to the following factors. First, too much stress was placed on heavy industries. This strategy proved to be inefficient and many small businesses were forced to close. Secondly, growing tension between Vietnam and China prompted many Vietnamese of Chinese origin to flee the country, and China stopped official assistance and pulled out engineers and specialists. Thirdly, the hurried collectivization of agriculture had led to the stiff resistance of farmers from the south and agricultural production stagnated. The Vietnamese government responded to the deteriorating economic performance by carrying out a series of experimental measures to reduce the degree of central planning during the Third Five-Year Plan (1981–85). Vietnam’s economic reform entered a new stage with the introduction of the Doi Moi policy in the Sixth National Congress of the

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Table 5.1 Economic performance of the Indochinese states

Growth rate of GDP(%) Cambodia Lao People’s Democratic Rep. Myanmar Thailand Vietnam Inflation Cambodia Lao People’s Democratic Rep. Myanmar Thailand Vietnam

Average 1981–90

1990

1991

1992

1993

1994

1995

– –

1.2 6.7

7.6 4.0

7.0 7.0

4.1 5.9

4.0 8.1

7.5 7.1

–0.1 7.9 7.1

2.8 11.2 2.3

–0.6 8.5 6.0

9.7 8.1 8.6

5.9 8.3 8.1

6.8 8.7 8.8

7.7 8.6 9.5

– –

145.7 35.6

87.9 13.5

176.7 9.8

31.0 6.3

26.1 6.7

3.5 19.4

11.8 4.4 191.2

17.6 5.9 67.5

32.3 5.7 67.4

21.9 4.1 17.6

31.8 3.4 5.3

24.1 5.1 14.4

24.7 5.8 12.7

13.4 –9.0

–1.3 –4.3

1.6 –3.5

1.0 –3.2

–1.9 –6.9

–5.4 –5.2

–1.8 –8.5 –4.2

–0.9 –7.7 –1.9

–0.6 –5.7 –0.1

–0.5 –5.6 –6.7

–0.4 –5.9 –6.2

–0.3 –7.5 –8.9

Current account balance (% of GDP) Cambodia – Lao People’s Democratic – Rep. Myanmar – Thailand – Vietnam –

Source: Asia Development Bank, Asian Development Outlook 1996 and 1997.

Communist Party in December 1986. The aim of the new policy was to revitalize the economy through promoting the transition from a planned economy to a market economy. To achieve these objectives, the following steps were subsequently implemented. In January 1988, a new foreign capital investment law was enacted. The government tried to introduce foreign capital by admitting wholly owned foreign companies and fixing tax rates at relatively low levels. The foreign capital investment law was amended in July 1989 to permit joint ventures between Vietnamese private enterprises and foreign companies. Agrarian reform undertaken in 1988 and 1989 shifted most economic power from the producer cooperatives to households. Farmers were allowed to retain one half of their crop for sale in free markets and the period of consigning land was extended from five years to ten years. In 1989, an ordinance was issued to enhance the provisions enacted in 1987 which granted autonomy of management to state enterprises. Subsequently, these enterprises had to operate on the basis of their own funds and borrowings from financial institutions without the state’s compensation for losses. In March 1989, the local currency was devalued sharply.

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Although Vietnam was hard hit by the breakdown of the CMEA system, the introduction of the Doi Moi policy has enabled it to make relatively smooth progress in economic liberalization and transition to a market-based economy since the late 1980s. The hyperinflation rate of over 300 per cent in 1988 has been reduced to a 10 per cent-plus level while GDP growth has accelerated to above 8 per cent since 1992. The benefits of the Doi Moi policy have been outstanding in the agricultural sector. The liberalization of production, distribution and prices in 1988 stimulated production. By 1989, Vietnam had become the world’s third largest rice exporter. Vietnam has also been successful in achieving a dramatic rise in foreign investment since the late 1980s, particularly following the lifting of the US embargo in February 1994. According to the State Committee for Cooperation and Investment, direct investment commitments totalled $18 billion between 1988 and 1995, of which US$7 billion were committed (and US$1.4 billion were implemented) in 1995. Although it will take some time for Vietnam to put the infrastructure and legal framework in place, with the international community ready to help and Vietnam ready to help itself, an economic take-off is on the way. Laos Among the socialist countries of Indochina, Laos has been undertaking the most fully fledged reforms to build a market economy. Even during the heyday of socialism, it had only a very rudimentary central planning system and, ironically, this meant that the negative legacy of central planning has been less damaging than in other economies in transition. As in Vietnam, the slow pace of industrialization prompted a major shift in economic policy in the latter half of the 1980s. A comprehensive reform program, known as Cintanakaan Mai or New Economic Mechanism, was officially adopted at the 4th National Convention of the Lao People’s Revolutionary Party held in November 1986. This was followed by concrete steps to liberalize prices, reform the financial and fiscal systems, privatize state enterprises, and promote private businesses and investment from abroad. In the agricultural sector, collectives were broken up and the ownership of land was transfered to farmers. Thanks to these measures, Laos has been successful in sustaining economic growth while reducing inflation to a single-digit level. Progress has also been made in restructuring the economy and assigning a larger role to the private sector. The inflow of foreign direct investment has accelerated, although investment has concen-

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trated in the tourist sector rather than the manufacturing sector as desired by the government. While the short-term economic performance of Laos has improved, the long-term growth prospect will hinge crucially on its ability to improve its infrastructure (both hard and soft), upgrade its human resources and generate funds for investment—areas in which foreign assistance is expected to play an important role. Cambodia In Cambodia, the process of market-oriented reform initiated in 1985 started to accelerated in 1988. Private businesses came to be recognized and prices were liberalized for most items. In 1989, reform was extended to agriculture, state enterprises, and foreign investment. Peasants were allowed to own land, state enterprises were granted more autonomy in production and pricing, and a foreign investment law was enacted to encourage joint ventures and foreign-owned enterprises. Despite these measures, the economy stayed in the doldrums in the followinSg years because the civil war continued to rage in the countryside and Cambodia remained isolated from the international community. The subsequent loss of foreign aid from the former Soviet Union was a further blow to the Cambodian economy. With the signing of the Paris Agreement, peace has finally returned to Cambodia. The first election under the supervision of UNTAC (United Nations Transitional Authority in Cambodia) took place in May 1993 and Prince Norodom Sihanouk was enthroned again as the King of Cambodia. The new government came into power with recognition and blessings from the international community. The chance of an economic take-off in Cambodia has improved with the return of peace but a number of problems need to be overcome. First, in spite of the Paris Agreement, economic and social conditions have remained unstable and the new government seems not to have the ability to control the new nation. Secondly, the country has little capital accumulation and the low level of income makes it difficult to increase savings. Consequently, investment activities in the near term will be dominated by foreign capital. Thirdly, the level of technology in Cambodia is very low. So far, Cambodian refugees who have experienced a market economy in advanced countries have yet to return, while those who have been repatriated from camps do not even have experience in agriculture. Fourthly, there is a shortage of infrastructure, while the administration lacks management capacity.

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Myanmar In Myanmar, the State Law and Order Council (SLORC) which took power through the coup in September 1988 abandoned the traditional approach of economic management in favour of a bold policy based on privatization, market economy and the introduction of foreign capital. In October 1988, the government liberalized imports and exports of all items except teak, petroleum products, natural gas, pearls and jewels. This was followed by the promulgation of a foreign investment law in November. In December, border trade with China was officially acknowledged and approval has since been extended to trade with Thailand and Bangladesh. The State Enterprise Law was enacted to limit statemonopolized businesses to sectors such as banking, electricity and forestry, and to allow private businesses to operate in all other sectors. Despite these liberalization measures, the economy remained stagnant from 1989 to 1991, thanks to political instability and suspension of assistance from international organizations and foreign governments. The economic situation in Myanmar started to improve in 1992 when Than Shwe replaced Saw Maung as SLORC chairman and martial law was lifted. Economic growth picked up but so did inflation. The inflow of foreign direct investment accelerated, with oil and gas exploration and hotel and tourism receiving the largest share. The release of Nobel Laureate Aung San Suu Kyi (the opposition leader who had been under house arrest since the 1988 coup) in July 1995 has cleared a major hurdle hindering the further increase in foreign direct investment and a resumption of official development assistance from the industrial countries. Subregional economic cooperation in Indochina As with the South China Economic Zone and various growth triangles in Southeast Asia, recent moves, towards regional integration in Indochina have been based less on political grounds than economic considerations. With political barriers separating nations fading on the back of the reverse domino effect, the Mekong River is emerging as a natural economic territory in which geographical proximity and ethnic and cultural ties as well as complementarity in economic structures form the bases of cooperation (see Figure 5.1). The Greater Mekong Subregional Economic Zone The concept of economic cooperation among countries in Indochina is not new and joint efforts to develop the Mekong River have always

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Figure 5.1 The Greater Mekong Subregion

been a major component of proposals for subregional cooperation. The Mekong River is the largest river on the Indochina Peninsula, stretching 4500 kilometres and with a basin of 185 000 square meters. The Mekong meanders through China’s Yunnan Province, Myanmar, Thailand, Laos and Cambodia and flows into the South China Sea through the fertile Mekong Delta in Vietnam. The Mekong Committee formed by Thailand, Vietnam, Laos and Cambodia in 1957 under the initiative of the United Nations represented the first major attempt at subregional cooperation in Indochina. The committee helped build dams and electricity plants with aid from the industrial countries. However, activities of the Mekong Committee virtually came to a halt with the establishment of the Pol Pot regime in Cambodia and the fall of Saigon in 1975.

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The idea of economic cooperation centering on the Mekong has been revived in recent years with the ending of the Cold War and the return of peace to Cambodia. The Mekong Committee was reinstated as the Mekong River Commission in 1992. An agreement among the four member countries regarding cooperation for sustainable development of the Mekong River Basin was signed in April 1995. This is to be achieved by promoting cooperation among member countries for the development of water use and management as well as preservation of the water and other natural resources related to the Mekong River. In addition, the agreement stipulates the principles governing water use, the organization of the Mekong River Commission and procedures for the dispute resolution. Meanwhile, the Asian Development Bank has taken initiatives to promote economic cooperation in the Greater Mekong Subregion. In addition to members of the Mekong River Commission, the parties involved include Myanmar and the Yunnan Province of China. The first ministerial meeting of the six countries concerned was held in October 1992. After a series of meetings it has been agreed that priority will be placed on the following six areas—transportation infrastructure (roads, railways, ports and airports), telecommunications, energy development, environment management, human resources development, and trade and investment. The total identified cost of these projects amounts to US$14.7 billion with the bulk of funds being spent on transportation and energy development (see Table 5.2). Major transportation projects under consideration include improving the road linking Bangkok, Phnom Penh, Ho Chi Minh City and Vung Tau; an east–west corridor linking Thailand, Laos and Vietnam; a highway between Chiang Rai in Thailand and Kunming in China’s Yunnan Province through Myanmar and Laos; improving the road system linking Kunming and Lashio in Myanmar, and construction of a railway connecting Xiangyun in Yunnan Province with Thailand. Major energy projects being planned include the Theun–Hinboun hydropower project in Laos, under which the bulk of the electricity will be sold to Thailand, and a gas pipeline linking Yadana, offshore Myanmar, to Bangkok. Financing for the projects will be sought from multilateral and bilateral agencies, the six governments involved and, above all, the private sector. Overseas investors from Hong Kong, Taiwan, Korea and Singapore are expected to play a major role. While more work is still required with respect to major infrastructure investments, several projects are close to the implementation stage.

146 Table 5.2

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Economic cooperation in the Greater Mekong Subregion— major projects in the transport and energy sectors (US$)

Transport sector Road projects 1 Bangkok–Phnom Penh–Ho Chi Minh City–Vung Tau road project 2 Thailand–Lao PDR–Vietnam East-West corridor 3 Chiang Rai–Kunming road improvement 4 Kunming–Lashio road system improvement 5 Kunming–Hanoi road improvement project 6 Southern Lao PDR–Sihanoukville road 7 Lashio–Liolem–Kengtung road improvement 8 Impoving road links among Yunnan Province, Lao PDR and Vietnam 9 Northern Thailand–southern Lao PDR–northern Cambodia–central Vietnam corridor Railway projects 1 Yunnan Province–Thailand railway 2 3 4 5 6 7 8

Yunnan Province–Vietnam railway improvement Thailand–Cambodia–Vietnam railway Extending the subregional railway network to Lao PDR through the First International Mekong Bridge Yunnan Province–Myanmar railway Northeastern Thailand–Lao PDR railway links Railway projects connected with mineral developments in Lao PDR Thailand–Myanmar railway

Water transport projects 1 Upstream Lancang–Mekong River navigation improvement 2 Mekong Delta navigation improvement studies 3

Red River navigation improvement

4 5 6 7 8 9 10

New Phnom Penh port development Sihanoukville port improvement Da Nang port improvement Cua Lo port improvement Hon La port development Cai Lan port development Thi Vai–Vung Tau port system development

Air 1 2 3 4

transport projects Cambodia airports improvement Kunming international airport improvement Myanmar airports improvement Second Bangkok international airport

5 6

Vietnam airports improvement New subregional air routes

Cost: $206.6 million. Cost: $192.4 million. Cost: $353.5 million. Cost: $817.4 million. Cost: $47.6 million. Cost: $33.1 million. Cost: $107.8 million. Cost: $99.3 million. Cost: $60.8 million.

Cost: $1.8 billion, excluding rolling stock. Cost: $65 million. Cost: $737 million. Cost: $180 million. Cost: $700 million. Cost: $475 million. Cost: $650 million. Cost: $550 million. Cost: $77 million. Cost: $3.4 million (studies only). Cost: $22 million (for component within PRC only). Cost: $95 million. Cost: $132 million. Cost: $71 million. Cost: $30 million. Cost: $300 million. Cost: $150 million. Cost: to be determined. Cost: $10.5 million. Cost: $45 million. Cost: $150 million. Cost: $5 billion (first phase). Cost: $500 million

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Table 5.2 Economic cooperation in the Greater Mekong Subregion— major projects in the transport and energy sectors (US$) (continued) Energy sector Power generation and transmission projects 1 Xe Kong and Se Basin hydropower development 2 Nam Tha hydropower project 3 Transmission interconnection of the Jinghong hydropower project 4 Nam Theun Basin hydropower development 5 Thalwin Basin hydropower development 6 Theun–Hinboun hydropower project

Cost: to be determined. Cost: to be determined. Cost: to be determined. Cost: to be determined. Cost: to be determined. Cost: $270 million.

Natural gas transmission projects 1 Yadana–Bangkok (Myanmar–Thailand) gas pipeline Source: ADB Review, November–December 1994, Asian Development Bank.

Bases for cooperation The six areas composing the Greater Mekong Subregion share the following common features and interests, which form the bases for economic cooperation.2 First, the Mekong River runs through all six countries, playing a key role in agriculture, forestry, fishing and energy generation. It provides not only an important means of transportation but also promises high hydropower potential, particularly in Yunnan, Myanmar, Laos and Vietnam. The region is also well endowed with timber in the highlands and is well suited for rice growing in the plains. Countries concerned share common interests in developing these resources as well as in environment preservation. As Asian Development Bank President Mitsuo Sato put it: ‘In the past, the Mekong River divided neighbouring countries. Today, it symbolizes a new spirit of cooperation’.3 The subregion is rich in resources and should be highly complementary to the fast-growing economies of East and Southeast Asia. Secondly, the areas composing the subregion share a common heritage. As its name suggests, ‘Indochina’ has been deeply influenced by both the Indian and the Chinese cultures. Buddhism is the major religion in most parts of the subregion. Vietnam, Laos and Cambodia were under French rule during the first half of the twentieth century. Thailand has a long historical relationship with Laos and shares some common language roots with the ethnic groups of Yunnan Province. Thirdly, all but Thailand are low-income countries making the transition from highly centralized and closed economies to more market-oriented and open ones. Areas composing the Greater Mekong Subregion lack internal capital and have to depend on external

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sources to finance economic development. Foreign investors will find it a more attractive place to invest if the countries involved coordinate their efforts to facilitate the flow of goods and services, human resources, information and funds across national borders. This has become all the more important now that China and India have emerged as major recipients of foreign direct investment among the developing countries. The emergence of these economies as a new frontier will provide business opportunities for Thailand and other neighbouring countries. The experience of the South China Economic Zone vividly illustrates how economic cooperation between more advanced regions and less developed ones can benefit both sides. Fourthly, intra-regional trade centering on Thailand has begun to flourish, and border trade in particular has been growing at a rapid pace. The lack of infrastructure, particularly in transportation, however, is becoming a bottleneck and improvement in the means of transportation is expected to boost trade among these countries. On the negative side, there is now rising concern that economic cooperation in the Greater Mekong Subregion may aggravate smuggling, drug trafficking and degradation of the natural environment. National and regional perspectives A basic precondition for economic cooperation among nations is that it benefits all participants. A review of the costs and benefits to individual countries serves as a starting point for predicting whether the Greater Mekong Economic Zone will turn out to be a success. Progress in cooperation among the Indochinese states should pave the way for their integration into the dynamic Asia-Pacific Region. Among the six members of the Greater Mekong Subregional Economic zone, Thailand has the largest GNP as well as the highest level of economic development. It is only natural that Thailand is expected to play a leading role in the process of regional cooperation. As summarized by the slogan ‘from a war zone to a trade zone’, Thailand’s policy towards the Indochinese states has turned from military containment to economic cooperation since the late 1980s. The Thai government has been actively promoting Bangkok as the gateway to Indochina, taking advantage of its strategic location and relatively advanced infrastructure. For Thailand, the Indochinese countries provide attractive opportunities in trade and investment as well as sources of raw materials. Indeed, Thai companies have been expanding their trade with and direct investment in the Indochinese states. At the same time, Bangkok is positioning itself to become the financial center for Indochina. The Bank of Thailand has established the Bangkok International Banking Facility (BIBF) to direct overseas

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funds into Indochina. The Thai baht is now widely circulated in Laos and used in settling trade between Thailand and the Indochinese states, giving rise to speculation that a Baht Economic Zone centering on Thailand and encompassing its neighbours in Indochina may begin to take shape. When Vietnam followed the path of socialism, it seemed that Indochina would be united under Vietnam’s leadership, because Laos and Cambodia were politically affected by it to a large extent. With the ending of the Cold War and Vietnam itself seeking to expand its relations with the West, however, the realization of such a scenario has become more and more remote. Instead of seeking political hegemony in Indochina, Vietnam’s national strategy has shifted to promoting economic development. Improving relations with the major powers (the United States and Japan) and the Asian countries (China, the Asian NIEs and the ASEAN countries) have set the stage for the integration of Vietnam into the global economy. Cooperation in the Greater Mekong Subregion represents a major step in this process. Situated in the center of the Mekong Basin, Laos is in the best position among the six participants to reap the fruit of cooperation. Being a land-locked country with a small population of about 4 million, in order to promote economic development Laos has no choice but to strengthen its ties with neighbouring countries. Economic cooperation in the Greater Mekong Subregion would promote trade, investment and tourism, and Thai capital has already been playing a growing role in these areas. The Thai–Lao Friendship Bridge across the Mekong River, opened in April 1994, is expected to serve as a gateway linking the two countries.4 Laos has the potential to develop into a major supplier of hydroelectric power to neighbouring countries. The country is already exporting 70 per cent of its electricity production to Thailand, bringing in annual revenues amounting to US$20 million. Expanding the capacity to generate electricity for export is a major component of Laos’ development strategy and to achieve this end, the government is eager to gain support from the Asian Development Bank initiative. The benefit of higher foreign exchange earnings, however, has to be balanced against the cost of environment degradation—substantial losses of wildlife, trees and marshland.5 Cambodia badly needs assistance from foreign countries to rebuild its war-torn economy. Economic cooperation in the Greater Mekong subregion should provide a major channel through which the country can strengthen its ties with the outside world. Cambodia is well endowed with tourist resources, including the famed temple complex of Angkor Wat, but this potential can only be realized through easier access from neighbouring countries.

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Myanmar would like to use economic cooperation in the Greater Mekong subregion as a major tool to vitalize its stagnant economy. The country is well endowed with natural resources such as natural gas, oil, precious stones and wood. With its history as a British colony until 1949, a British legal framework is in place and English is widely used. Whether such advantages over its neighbours can be realized would depend on its ability to attract foreign direct investment, which in turn requires putting the necessary infrastructure in place. The Asian Development Bank initiative provides an important channel through which foreign official development assistance can be mobilized to achieve this end. Economic development in Yunnan has lagged far behind other parts of China and the Chinese government hopes that strengthening ties with Indochina will help change the picture. Located in the southwest of China, most of the province is made up of mountainous areas and economic linkage with the dynamic coastal regions has been hampered by the high cost of transportation. On the other hand, Yunnan Province shares a common border with Myanmar, Laos and Vietnam extending for 4000 kilometers. The promotion of economic development of border regions has become a major component of China’s open-door policy; in 1992, Kunming, the capital city of Yunnan, was granted preferential treatment similar to that enjoyed by major cities in the coastal region. Improvement in transportation links would sharply improve Yunnan’s access to major ports in Indochina and shorten its distance to overseas markets. In addition to the Greater Mekong Subregional Economic Zone, ASEAN provides another conduit through which the Indochinese states can bring in the wave of industrialization from their dynamic neighbours. The signing of the Paris Agreement on Cambodia has removed the final hurdle separating ASEAN from the socialist countries in Indochina. Improving political relations have been accompanied by rising trade and investment between the two sides and, in the future, the Indochinese states could provide business opportunities not only for Thailand but also act for other ASEAN countries. Already, the concept of a Southeast Asian Community which aims at an expansion of ASEAN to include Vietnam, Cambodia, Laos and Myanmar has been discussed at the 1994 ASEAN ministerial meeting held in Bangkok. As a major step in this direction, Vietnam gained full membership of ASEAN in July 1995 and the other three Indochinese states are expected to follow soon. The expanding ASEAN will not only serve as the building block for the formation of an economic zone covering the whole of Southeast Asia, but also act as a countervailing force against the emergence of China as a regional economic and political power.

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Notes 1 For details of the reform processes in Vietnam, Laos and Cambodia, see ADB (1993). 2 See, for example, Krongkaew (1994). 3 See Gill (1994). 4 The bridge cost US$30 million and was financed by Australian official development assistance. 5 See Gill (1994a).

References Asian Development Bank (1993) Asian Development Outlook 1993, Asian Development Bank: Manila. Krongkaew, M. (1994) ‘The Development of Thailand–Yunnan/Indochina Economic Zone: A Thai View’, paper presented at the Fourth Joint Research Conference on Asia–Pacific Relations organized by the Foundation for Advanced Information and Research (FAIR) and the China Center for International Studies (CCIS), 14–17 September 1994, Beijing. Gill, I. (1994) ‘$12-b Projects to Ensure Lasting Peace,’ ADB Quarterly, May, Asian Development Bank: Manila. ——(1994a) ‘Lao PDR’s Dilemma—Hydropower versus Environment,’ ADB Quarterly, May, Asian Development Bank: Manila.

6

Towards a borderless economy in Asia C.H. Kwan

The trend towards deepening economic interdependence in the Asia– Pacific region has accelerated since the global realignment of exchange rates in the latter half of the 1980s. The decline of US economic power and the ensuing intensification of trade friction have reduced the importance of the United States as a market for Asian exports. At the same time, the increase in foreign direct investment among the Asian countries themselves and the integration of China into the regional economy have boosted intra-regional trade. The Asian countries have also emerged as major trading partners for both Japan and the United States. This chapter studies the implications of these recent changes in the direction of trade and investment for the pattern of macroeconomic interdependence in the Pacific region. The chapter begins by describing Asia’s transition to self-sustaining growth on the back of expanding new frontiers into the socialist countries and deepening intra-regional interdependence through trade and investment. The next section studies the interdependence between Asia and Japan by examining the impact of the yen’s recent appreciation. Finally, there is a discussion of the implications of our analysis for trade and investment policies, the formation of a yen bloc, and regional integration. Asia’s transition to self-sustaining growth The Asia–Pacific region has firmly established itself as the growth center of the global economy. Countries in the region have not only 152

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grown much faster than the industrialized countries but also have become more and more able to generate demand from within the region. The desynchronization of Asian and US growth rates The weakening link between the economic growth rates in Asia and in the industrialized countries is apparent by noting the desynchronization of Asian and US economic growth rates (Figure 6.1). This can be confirmed by estimating the elasticity of Asia’s economic growth rate with respect to changes in the OECD and US growth rates using the tool of simple regression (Figure 6.2). In the 1970s, a 1 per cent increase in the economic growth rate of the OECD countries tended to raise that of the Asian NIEs and ASEAN by 1.3 per cent. The figure has fallen to only 0.6 per cent in the last ten years. This largely reflects the desynchronization between Asian and US economic growth rates. A 1 per cent increase in the US economic growth rate now tends to raise Asian economic growth by only 0.1 per cent, compared with 1.0 per cent back in the 1970s. The Asian countries are thus less vulnerable than before to a recession in the OECD or the US. The other side of the same coin, however, is that the positive effect on Asian economic growth of a recovery in the industrialized countries or the United States is limited.

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Despite all these changes, the (mis)perception that Asia’s economic performance is basically determined by that of the industrialized countries has persisted. The majority view that when the US sneezes, Asia catches a cold has remained. Most economists still focus on the US economic growth rate when projecting economic growth in the Asian countries, while they should be paying more attention to regional and domestic factors. As a result, they have failed to predict (or even explain) the relatively robust growth in the Asian countries in the early 1990s when the United States and other industrialized countries were suffering a recession. The major factors favouring self-sustaining growth in Asia are the integration of China into the regional economy and rising intraregional trade and direct investment. The relative decline in US

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economic power and rising trade friction between nations on either side of the Pacific have prompted Asian countries to diversify their export markets and to trade more among themselves. The increase in foreign direct investment from Japan and the Asian NIEs to ASEAN and China has boosted intra-regional trade. At the same time, China has emerged as a trading power in the region. The economies of Hong Kong and Taiwan have come to be more and more integrated with China through trade and investment. The emergence of China as a regional economic power With economic growth averaging almost 10 per cent per annum in the last fifteen years, China is fast emerging as a major regional economic power if not a global one. This is particular true when China is broadly interpreted to include Hong Kong and Taiwan. Integration among the three economies has now reached a point where they have come to be known as Greater China or the Chinese Economic Area. The World Bank estimated that when adjusted for the difference in purchasing power, the gross domestic product of Greater China has now surpassed that of Japan and, given the current pace of economic growth, will surpass that of the United States by the year 2002 to become the number one economic power of the world (see Table 6.1). At the same time, Greater China’s total trade and total foreign exchange reserves have now surpassed those of Japan (Figures 6.3 and 6.4). China’s transformation to a market economy and opening to the world will have a major effect on neighbouring countries. First, China is now a model to follow for socialist countries in the region, helping to accelerate the reverse domino phenomenon. The rapid transformation of Vietnam into an open economy vividly illustrates this trend, and it is only a matter of time before North Korea follows China’s Table 6.1 Emergence of the Chinese Economic Area as a global power (gross domestic product) (US$ trillions) At market prices At standard international prices (ppp) Country Chinese Economic Area United States Japan Germany

1991

2002

1990

2002

Per capita income 2002 (US$)

0.6 5.5 3.4 1.7

2.5 9.9 7.0 3.4

2.5 5.4 2.1 1.3

9.8 9.7 4.9 3.1

7300 36 000 37 900 39 100

Source: World Bank, Global Economic Prospects and the Developing Countries, April 1993.

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footsteps. Secondly, the Asian NIEs, which are more developed than China, should benefit from expanding investment and trade with China. This is particularly true for Hong Kong and Taiwan which are now major investors in China. Thirdly, risks from the return of Hong Kong to China in 1997 should be greatly reduced due to the virtual economic integration of China and Hong Kong. Indeed, Hong Kong is expected to play an even more important role as the gateway to China after 1997. Fourthly, the ASEAN countries may find China emerging as a tough competitor not only for export markets but also for foreign direct investment. The shift of direct investment from ASEAN to China has become apparent since 1992. Rising intra-regional trade and investment The Asia-Pacific region has emerged as one of the world’s top trading regions with its share of world trade increasing from 14.6 per cent in 1980 to 24.3 per cent in 1994. The Asian NIEs, ASEAN and China together have a larger share of world trade than the United States (Figure 6.5). The Asian NIEs’ share of world trade reached 10.1 per cent in 1994 and their share of world imports has surpassed that of Japan since 1987. The four Asian NIEs now rank among the world’s top twenty trading countries. They also house the world’s top three container ports (Table 6.2). China and the ASEAN countries are also catching up from behind. China’s share of world trade has quadrupled since the late 1970s when the government shifted to an open-door economic policy. In the second half of the 1980s, trade in the ASEAN countries recovered from a trough on the back of the recovery in the prices of primary commodities and rising foreign direct investment in the manufacturing sector. Table 6.2 Ranking of leading container ports, 1994 Rank 1 2 3 4 5 6 7 8 9 10

Port Hong Kong Singapore Kaohsiung Rotterdam Pusan Kobe Hamburg Long Beach Los Angeles Yokohama

Throughput (TEUs) 11 10 4 4 3 2 2 2 2 2

Source: Containerisation International, September 1995.

050 400 899 539 213 915 725 573 518 317

030 000 879 253 637 853 718 827 618 102

% change 20.1 15.0 5.7 9.1 4.7 8.6 9.6 23.8 8.6 6.9

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In contrast, the US share of world trade has fallen since the mid1980s. In particular, its share of world imports dropped sharply from 19.1 per cent in 1985 to 16.5 per cent in 1994, reflecting slower economic growth and the need to reduce its immense trade deficit. Until the mid-1980s, trade in the Asia-Pacific region had been dominated by exports across the Pacific Ocean, but this pattern of trade flow has changed dramatically in the last few years. In line with the global trend toward regionalism, intra-regional trade among AsiaPacific countries has increased sharply, while the relative importance of the United States as an export market for these countries has declined. In contrast, the share of US exports absorbed by the AsiaPacific region—particularly the Asian NIEs—has started to grow.

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A look at the degree of export dependence of the Asia-Pacific region (including Japan) broken down by region shows that the share of intra-regional trade rose from 30.9 per cent in 1986 to reach 45.7 per cent in 1994 (Figure 6.6). In contrast, the share of the US market dropped from 34.0 per cent to 24.5 per cent over the same period. The shift of export destinations from the United States to the AsiaPacific region is particularly marked for the Asian NIEs. Asia has also replaced the United States as Japan’s largest export market (see Figure 6.7). Japanese exports to Asia reached US$186.5 billion in 1995, accounting for 42.1 per cent of total Japanese exports. Growth in Japanese imports from Asia, however, has lagged far behind. This asymmetry has led to a rapid expansion of the bilateral trade imbalance in Japan’s favour. Indeed, Japan’s trade surplus with Asia has surpassed that with the United States since 1993 (Figure 6.8). With the Asia-Pacific region expected to grow at twice the US rate (three times the US rate when Japan is excluded) in the rest of the

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1990s, the shift of exports from the US back to within the region will continue. On the other hand, the Asia-Pacific region will grow in importance as a market for US exports. This trend will be hastened by asymmetric trade policies on the two sides of the Pacific—acceleration in import liberalization in Asia and rising protectionism in the United States. Reflecting the changing direction of trade, traditional economic relations in the Pacific region characterized by unilateral dependence of Asian countries on the United States are giving way to relations characterized by Pan-Pacific interdependence. In addition to the market-size factor, rising intra-regional investment has also contributed to the recent surge in intra-regional trade. In the Asia-Pacific region, Japanese direct investment has surpassed that of the United States while the Asian NIEs have also emerged as major investors. Currency appreciation in Japan and the Asian NIEs since the 1985 Plaza Accord has prompted companies in Japan and the Asian NIEs to move their production facilities overseas. The sharp appreciation of the yen since early 1993 has led to a new wave of Japanese investment in Asia. The impact of the yen’s appreciation on the Asian economies Given the Asian countries’ exchange-rate policy of pegging loosely to the dollar, an appreciation of the yen against the dollar also means a depreciation of the Asian currencies against the yen. Since 1985, the yen has appreciated sharply not only against the dollar but also against all major Asian currencies. The appreciation of the yen has both positive and negative effects on Asian economic growth. While some countries may benefit more than others and some may actually be harmed, experience in the last ten years has shown that the overall impact of a stronger yen on Asian economic growth is certainly a positive one. Diverse channels of transmission A stronger yen affects economic growth in the Asian economies mainly through the following four channels: inflow of foreign direct investment, export competitiveness, cost of imports, and cost of financing (yen-denominated) external debt. While the effects of the first two factors on the Asian economies are positive, they are partly (and for some countries completely) offset by the negative effects of the last two factors. First, a stronger yen widens the gap between the cost of production in Japan and the Asian countries, giving Japanese companies more incentive to relocate facilities from the former to the latter. The flow

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of foreign direct investment has the effect of boosting the Asian countries not only on the demand side but also on the supply side through transferring technology and expanding production capacity. The economic growth rate in the Asian countries follows closely the trend in the inflow of direct investment from Japan, which in turn follows closely the ups and downs in the yen–dollar rate (Figure 6.9). Secondly, an appreciation of the yen against the dollar, by raising Japanese export prices in dollar terms, makes Japanese exports more expensive than those from the Asian countries. As a result, the competitiveness of Asian exports against Japanese products in international markets improves. This gain is expected to be particularly large for the Asian NIEs, whose export structures are similar to that of Japan. Thirdly, an appreciation of the yen raises import prices in the Asian countries as they are heavily dependent on Japan as a source

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of capital goods and intermediate goods. Higher import prices in turn squeeze profit and reduce output. Fourthly, an appreciation of the yen raises the burden of debt repayment in the Asian countries. The negative impact on economic growth is proportional to the size of the external debt denominated in yen. Since the bulk of the Asian countries’ yen-denominated debt is in the form of official development assistance (ODA) from the Japanese government, poorer countries are more likely to be adversely affected. A higher cost of debt servicing may force governments to tighten public expenditures (on infrastructure, for example) and drag down the rate of economic growth. Winners and losers The impact of a stronger yen on an Asian country’s economic growth depends on the relative magnitude of the repercussion through trade, investment and debt repayment. The combined effect may differ not only from one country to another but also for the same country over time. Generally speaking, the more advanced Asian countries such as the Asian NIEs, which have trade structures resembling that of Japan, are more likely to benefit from a stronger yen. In Korea, Taiwan, and Singapore, for example, the positive effect of a gain in export competitiveness more than offsets the negative effect of higher import prices on economic growth. Although these countries now have to face keen competition with the ASEAN countries and China for Japanese investment, they do not have large yen-denominated debt. On the other hand, Asia countries at lower levels of economic development are likely to suffer from the yen’s appreciation. Indonesia, the Philippines and China, for example, have large yendenominated debts and are highly dependent on imports from Japan. Their exports, however, do not compete much with Japanese exports in international markets. The negative effect of a stronger yen on economic growth through higher costs of financing debt repayment and imports from Japan can only be partly offset by a larger inflow of Japanese investment. The impact of a stronger yen on Thailand and Malaysia lies somewhere in between. Although their gain in competitiveness is smaller than that of the Asian NIEs, they have enjoyed substantial increases in the inflow of direct investment from Japan. These two effects together should be large enough to offset the negative effects of higher import prices and a heavier debt burden.

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Weakening asymmetry The appreciation of the yen after the Plaza Accord in 1985 had asymmetric effects on the Asian NIEs and ASEAN countries. With export structures similar to that of Japan, the Asian NIEs gained in terms of export competitiveness and a large inflow of direct investment from Japan. In contrast, the ASEAN countries suffered higher import prices and a rising burden of debt repayment. As a result, the Asian NIEs achieved double-digit growth in 1986 and 1987, while the ASEAN countries remained in the doldrums. The ASEAN countries only picked up in 1988, when they gained in foreign direct investment at the expense of the Asian NIEs which were suffering from currency appreciation and rising wages. The positive impact of the latest round of the yen’s appreciation in the first half of the 1990s on the Asian NIEs was smaller than the previous round for the following two reasons. First, these countries’ attractiveness as offshore production bases for Japanese companies had declined relative to the ASEAN countries and China. Secondly, facing tough competition from other Asian developing countries in labour-intensive products, the gain in export competitiveness was confined to capital- and technology-intensive products which competed directly with Japan. In the case of Korea, for example, exports of automobiles, steel, and computers surged but those of textiles and footwear remained sluggish (Figure 6.10). In contrast, the ASEAN countries were in a better position to benefit from the latest round of the yen’s appreciation, as a large inflow of Japanese investment since the late 1980s had built the foundation for further development. Like the Asian NIEs in 1986–87, they experienced an acceleration in exports and an inflow of investment from Japan on the back of a stronger yen. The surge in Japanese investment included a larger proportion of investment in high-value-added products and processes which helped to upgrade the ASEAN countries’ industrial structure. The sharp rise in the inflow of foreign direct investment and export capacity also helped the ASEAN countries to reduce their burden of repaying yen-denominated debt. The experience of Malaysia vividly illustrates this point. Thanks to the large inflow of foreign direct investment in the last ten years, Malaysia has transformed itself from a developing country heavily dependent on exports of primary commodities to a newly industrializing country highly competitive in manufacturing. The share of primary commodities in total Malaysian exports has dropped from about 70 per cent in the mid-1980s to about 30 per cent currently while that of manufactured goods has risen from 30 per cent to 70 per cent. Malaysia has become better prepared to benefit in terms of stronger exports. Indeed, led by electronics products, Malaysia’s

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exports surged, pushing economic growth to over 8 per cent between 1993 and 1995. This contrasted sharply with the situation in 1985– 86 when Malaysia suffered two consecutive years of zero growth. China, which failed to ride the tide of the yen’s appreciation in the latter half of the 1980s, turned out to be the largest destination for Japanese investment in Asia in the first half of the 1990s. Like the overseas Chinese before them, Japanese companies took advantage of the improvement in China’s investment environment. According to a survey by the Japan External Trade Organization in 1993, China was ranked by Japanese companies as the most attractive destination in which to set up new plants for all major industries, ranging from textiles to precision machinery (Table 6.3). Despite China’s monetary tightening since 1993, the boom of Japanese investment in China continued into 1994 and 1995. Part of the increase in Japanese investment in China might have been at the expense of the Asian NIEs and the ASEAN countries (Table 6.4). More and more Japanese

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Table 6.3 Attractive countries and regions for new Japanese investment Poll of 625 companies (multiple answers) Rank All industries Foods Textiles Clothing

1 China 58.1 China 72.0 China 83.3 China

72.2 China 60.0 Chemicals China 45.5 Pharmaceuticals China 44.4 Rubber products China 62.5 Ceramics China 45.0 Iron/steel China 70.6 Non–ferrous metals China 61.5 Metal products China 58.8 Machinery China 47.9 Electronics/electrical China 51.3 Electronics (parts) China 77.4 Transportation China machinery 70.0 Transportation China machinery (parts) 51.4 Precision machinery China Pulp/papers

Others

2

(Polling score; %) 3

4

5

EC US Indonesia Malaysia Asian NIEs ASEAN 15.8 15.7 13.4 13.3 15.7 30.9 US Indonesia EC Thailand 16.0 14.0 12.0 10.0 20.0 20.0 Indonesia EC HK Other Asia 27.8 11.1 11.1 11.1 11.1 27.8 US Other Asia EC Thailand, Indonesia 16.7 11.1 5.6 5.6 – 11.1 US Thailand Indonesia 60.0 20.0 20.0 – – 40.0 EC Indonesia US Malaysia 25.8 25.2 22.7 18.2 18.2 43.9 EC US 33.3 22.2 – – 33.3 22.2 US EC Thailand Malaysia 12.5 12.5 12.5 12.5 – 12.5 Other Asia EC US Thailand 30.0 20.0 15.0 15.0 20.0 30.0 Indonesia Malaysia Singapore Philippines 41.2 29.4 17.6 17.6 23.5 52.9 Malaysia Other Asia Thailand Indonesia 30.8 30.8 23.1 23.1 15.4 69.2 Thailand Malaysia EC Indonesia 17.6 17.6 15.7 15.7 19.6 39.2 EC US Taiwan Thailand 19.7 16.9 12.7 12.7 25.4 26.8 EC US Malaysia Indonesia 20.0 16.3 15.0 10.0 12.5 28.8 Philippines US EC Malaysia 16.1 12.9 12.9 12.9 – 35.5 Malaysia US EC Other Asia 20.0 Thailand

15.0 US

21.6 US

18.9 EC

65.1 China

20.9 Indonesia

18.6 US

55.9

14.7

11.8

15.0 Malaysia

15.0 EC

18.9 16.2 Malaysia Thailand, Singapore 11.6 9.3 Other Asia Taiwan, Malaysia 11.8 8.8

15.0

30.0

8.1

35.1

16.2

25.6

14.7

22.1

Source: Japan External Trade Organization, July 1993.

companies favoured China over the Asian NIEs and the ASEAN countries because China, with its large population and high growth rate, promised to become an important market over the medium

Table 6.4 Japan’s direct investment in the Asian countries FY1989 $mil. % share Asian NIEs South Korea Taiwan Hong Kong Singapore ASEAN 4 Indonesia Malaysia Philippines Thailand China

4900 606 494 1898 1902 2782 631 673 202 1276 438

7.3 0.9 0.7 2.8 2.8 4.1 0.9 1.0 0.3 1.9 0.6

NIEs+ASEAN4+China 8120 US Europe World total

FY1990 $mil. % share

FY1991 $mil. % share

3355 284 446 1785 840 3242 1105 725 258 1154 349

5.9 0.5 0.8 3.1 1.5 5.7 1.9 1.3 0.5 2.0 0.6

1922 225 292 735 670 3197 1676 704 160 657 1070

5.6 0.7 0.9 2.2 2.0 9.4 4.9 2.1 0.5 1.9 3.1

12.0

6946

12.2

5865 14.1

6189 18.1

48.2 21.9

26 128 14 294

45.9 25.1

18 026 43.3 9371 22.5

13 819 40.5 7061 20.7

2419 245 292 1238 644 2398 813 800 207 578 1691

6.7 0.7 0.8 3.4 1.8 6.7 2.3 2.2 0.6 1.6 4.7

2865 400 278 1133 1054 3888 1759 742 668 719 2565

FY1995 $mil. % share Yo Y % 3208 445 451 1137 1175 41 381 1591 570 711 1229 4439

6508 18.1

9318 22.7

11 784

23.1

26.5

14 725 40.9 7940 22.0

17 331 42.2 6230 15.2

22 451 8511

44.1 16.7

29.5 36.6

67 540 100.0 56 911 100.0 41 584 100.0 34 138 100.0 36 025 100.0 41 051 100.0 50 942 100.0

24.1

Note: Figures do not include reinvestment. Source: Japanese Ministry of Finance.

5.3 0.6 1.0 2.2 1.5 7.4 2.9 2.1 0.5 1.9 .4

FY1994 $mil. % share 7.0 1.0 0.7 2.8 2.6 9.5 4.3 1.8 1.6 1.8 6.2

32 540 14 808

2203 260 405 925 613 3083 1193 880 203 807 579

FY1992 FY1993 $mil.% share $mil. % share

6.3 12.0 0.9 11.3 0.9 62.3 2.2 0.3 2.3 11.4 8.1 6.4 3.1 –9.6 1.1 –23.1 1.4 6.5 2.4 71.0 8.7 73.0

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term.1 China’s policy of opening her markets in return for technology transferred has resulted in foreign countries favouring direct investment over exports as a means to access the Chinese market. Asia as a built-in stabilizer for Japanese exports With Asia now absorbing over 40% of total Japanese exports, the economic growth in the neighbouring countries has become a major determinant of Japan’s macroeconomic performance. Despite growing concerns of rising unemployment and a hollowing out of industry resulting from the outflow of investment, Japan will no doubt benefit from the emergence of Asia as its major business partner. In the short run, stronger economic growth in the Asian economies resulting from the inflow of Japanese investment has been reflected in stronger Japanese exports to the region. This has partly helped offset the deflationary effect of weaker exports to the industrialized countries. Japanese exports to the Asian NIEs, in particular, have followed closely movements in the yen–dollar rate and the Asian NIEs’ export growth. Japanese exports to the NIEs surged between 1986 and 1988 against a background of an export boom in the Asian NIEs themselves, which in turn resulted from the yen’s sharp appreciation against the dollar. The situation was reversed between 1989 and mid1990 when the yen depreciated against the dollar. The rebound of the yen since mid-1990 has again been accompanied by a recovery in the NIEs’ exports and Japanese exports to the Asian NIEs. The relations between the yen–dollar rate and Japanese exports to the Asian NIEs can be explained by examining the link between the yen–dollar rate and the Asian NIEs’ export growth rate, and then that between the NIEs’ export growth rate and Japanese exports to the Asian NIEs. As discussed above, the Asian NIEs are competitors of Japan in international markets, and their currencies are loosely pegged to the dollar. An appreciation of the yen, for example, by driving up Japanese export prices in dollar terms, boosts the Asian NIEs’ exports, not only in Japan, but also in other countries. On the other hand, in order to expand exports, the Asian NIEs have to import capital and intermediate goods (including parts and components) from Japan. This reflects the high complementarity between Japanese exports and the NIEs’ imports (or the dependence of the Asian NIEs on Japan). An appreciation of the yen therefore boosts Japanese exports to the Asian NIEs indirectly through this income effect. Theoretically, an appreciation of the yen should curb exports to the Asian NIEs through the negative price effect, but the effect here is very small because Japanese exports are composed mainly of goods that cannot be produced domestically in the Asian NIEs.

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In contrast to exports to the Asian NIEs, Japanese exports to other major markets (the United States and Europe, for example) are more responsive to changes in prices. When the yen appreciates, exports to these markets tend to slow down. Exports to the Asian NIEs thus act as a built-in stabilizer for total Japanese exports, partly offsetting the decline in overall exports as the yen appreciates and the increase as the yen depreciates. Reflecting the asymmetric impact of the yen’s fluctuation on Japanese exports to the Asian NIEs and to other markets, the Asian NIEs’ share of Japanese exports tends to rise when the yen appreciates and decline when the yen depreciates (Figure 6.11).2 With Japanese investment shifting from the Asian NIEs to the ASEAN countries and China, the same built-in stabilizer effect has also become apparent for Japanese exports to the latter regions. The appreciation of the yen in the first half of the 1990s was accompanied by a surge in Japanese exports to the ASEAN countries and China, which have come to account for a larger share of total Japanese exports. Policy implications Our analysis of the impact of the yen’s appreciation on the Asian economies has strong implications for industrial policy in the industrialized countries, exchange-rate policy in the Asian countries, and multilateral cooperation at the government level. Trade and industrial policies in the industrialized countries Boosted by the expansion of new frontiers and deepening intraregional interdependence through trade and investment, the dynamism of the East Asian economies is expected to be sustained. Like Japan’s transformation into an economic power between the 1960s and the 1980s, the emergence of East Asian developing countries is likely to confront the world economy with numerous opportunities and challenges. The following issues are likely to be of particular significance. First, will industrialization in East Asia necessitate industrial restructuring on a global scale, and could this process lead to an intensification of economic friction with the advanced economies? Secondly, does East Asia have the potential to become a growth center for the global economy? Thirdly, will East Asia’s rising demand for capital funds create upward pressure on world interest rates? Fourthly, will East Asia’s industrialization place stress on the global environment and resources (especially energy)? Fifthly, will the emergence

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of East Asia (China, in particular) as an economic power upset the global military balance? Coping with these issues will be a shared policy priority for many countries in the years ahead. Global industrial restructuring has already become a real issue. East Asia’s developing countries are taking advantage of their low labour costs and rapidly improving productivity to expand their exports, thereby having damaging effects on some industries in the developed economies. The situation has been reflected in growing fears of escalating trade imbalances and trade friction between the two sides, in addition to a hollowing out of industries in the advanced economies. On the other hand, more and more multinationals have found East Asia a promising export market and an attractive investment destination. In addition to utilizing the region’s increasing industrial power, business opportunities are springing up in infrastructure development (energy, transportation, telecommunications, etc.), capital markets and retailing. Effective positioning in the East Asian econo-

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mies will determine the winners among multinationals of the global competitive race into the twenty-first century. Faced with the significant economic achievements of Japan, the United States and European countries have imposed trade barriers on Japanese products in the form of tariffs and quantitative restrictions since the 1960s. The same measures have been applied also to the Asian NIEs and other developing countries in Asia. However, to maintain the vitality of the global economy and realize the benefits of international division of labour, countries at more advanced levels of economic development should not seek to protect their declining industries; rather, they should upgrade their own industrial structures by investing in research and development. Imposing barriers on trade and outward direct investment can only delay the upgrading of industrial structures in both the advanced countries and the developing countries. Protectionist measures may also lead to trade wars and a disintegration of the free trade system. This is particularly true for economic relations between Japan and its neighbours. Facing the yen’s sharp appreciation, Japanese companies are relocating their production facilities to the Asian countries. This should help promote economic development in the Asian countries on one hand, and release resources for emerging industries in Japan on the other. So far Japan has contributed to economic development in the Asian countries on the supply side by providing the necessary funding and technology through investment and trade. From now on, Japan should play a larger role on the demand side as an ‘absorber’ of Asian exports. Japan should abandon the mercantilist view that production and exports are good while consumption and imports are bad. Instead it should pursue policies that promote international division of labour according to comparative advantage. By relocating declining industries abroad and liberalizing imports, Japanese producers and consumers should gain in real income, resulting from lower costs of production and import prices. More importantly, prosperity in the Asian countries will promote stability in the Asia-Pacific region, and thus Japan’s own national security. The same policy stance is also desired for countries catching up with Japan, and major steps have been taken in the right direction. South Korea, for example, has broadened the list of industries eligible to invest overseas and at the same time has expanded credit granted to help relocate declining industries abroad. Singapore is building an ‘external wing’ to complement the domestic economy; the government has been playing an active role in the development of the growth triangle as well as promoting investment in China. Thailand is strengthening its ties with neighbouring countries in Indochina. Hong Kong does not pursue an active industrial policy but has achieved

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an upgrading of its industrial structure by relying on the market mechanism. Industrial restructuring across national borders is expected to proceed at an unprecedented scale. The Asian countries should participate actively in this process by promoting a two-way flow of direct foreign investment. Asia’s transition to a borderless economy is not a zero-sum game; both investing and recipient countries should benefit from the improved allocation of resources. Yen for an anchor The Asian countries have, up to now, focused on the bilateral rates between their local currencies and the dollar in formulating national exchange-rate policy. However, as we have discussed above, they have experienced wide fluctuations in economic growth brought about by the wide swings in the yen–dollar rate sine 1985. To adapt to the new international environment, the traditional exchange-rate policy of a loose peg to the dollar may have to be amended, with more emphasis on the Japanese yen. When the policy objective is to stabilize output (or inflation, if we assume some trade-off between output and inflation in the short run), a country should peg its currency to a basket with large weights for competitors’ currencies and small or even negative weights for major suppliers’ currencies. When applied to the Asian countries, the Asian NIEs (Korea and Taiwan in particular), which have export structures similar to that of Japan, may benefit by pegging to the yen (or by increasing the weight of the yen in the reference basket of currencies when managing their exchange rates). The reverse may be true for primary commodity exporters that rely heavily on Japan as a source of imports (the ASEAN countries, for example). Other things being equal, the Asian NIEs have more incentive than the ASEAN countries to peg their exchange rates to the yen. The argument that the Asian countries should peg their currencies to the dollar because the United States is their largest export market can be challenged on two grounds. First, being the major market does not usually imply being a competitor or an unimportant supplier of the export country, so that the weight in the optimal basket of the currency of a trading partner does not need to be proportional to that country’s share of the host country’s exports. Secondly, the share of Asian countries’ exports to the United States has been declining rapidly since 1986. This trend is expected to continue in the future in view of the need for the United States to reduce its trade deficit; in its place, the share of intra-regional trade among Asian countries is expected to increase.

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The current rapid pace of industrialization in the Asian countries is expected to continue, thereby likely favouring a more important role for the yen in the management of exchange rate policies. The Asian NIEs’ commodity composition of exports will become increasingly similar to that of Japan, while the ASEAN countries’ export composition will approach that of the Asian NIEs. As a result, the benefits in terms of output stability for an Asian country or pegging its currency to the yen will increase. By lowering the risk associated with exchange rate fluctuations, pegging to the yen may also benefit the Asian countries by expanding their trade with and capital inflows (foreign direct investment in particular) from Japan. Strengthening ties with Japan has become all the more important now that the United States alone can no longer play the role of economic locomotive for the Asian countries. Indeed, the gyration in the US dollar against other major currencies has prompted some Asian countries to loosen the traditional link between their currencies and the US dollar. Monetary authorities in these countries seem to be paying increasing attention to the stability of their exchange rates against other major currencies, notably the yen. Since the beginning of 1995, movements of some Asian currencies against the dollar have closely paralleled the fluctuations in the yen–dollar rate (Figure 6.12). The sharp appreciation of the yen against the dollar in the spring of 1995 was accompanied by an appreciation of the Korean won, the New Taiwan dollar, the Singapore dollar, the Malaysian ringgit and the Thai baht. The upward trends in these currencies were reversed in that summer as the yen depreciated against the dollar. Based on the hypothesis that the Asian countries peg their exchange rates to specific baskets of currencies (albeit loosely), the strengthening synchronization between the Asian currencies and the yen can be interpreted as the result of monetary authorities increasing the weight of the yen in those baskets. This major shift in exchangerate policy in the Asian countries may herald Asia’s transition from a dollar bloc to a yen bloc. Multilateral cooperation at the government level Regional cooperation in Asia so far has been achieved mainly by the initiative of the private sector. Recently, regional economic integration with coordination among governments in Asia, which has lagged far behind that in Europe and North America, is also gaining momentum (Figure 6.13). Although the process has been shaky at times, Asia’s transition to a borderless economy has worked as a dominant force promoting

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multilateral cooperation at the government level. As we have seen earlier: intra-regional trade increased significantly; Japan and the NIEs have become major investors in the region, surpassing the US and European nations; subregional economic zones have emerged and the rise of China as an economic power has helped to lessen concerns of Japanese domination of the region. Meanwhile, Asia-Pacific Economic Cooperation (APEC) is emerging as the dominant force of economic cooperation in the Pacific region. Its members now include all the major players on both sides of the Pacific. Since the first ministerial meeting in 1989, APEC’s role has centered on the promotion of dialogue and cooperative sectoral projects to deal with the major problems affecting the region’s economy; trade and investment liberalization has recently also become an important agenda. At the 1994 APEC Summit held in Jakarta, the participating countries reached a consensus on a twospeed schedule stipulating that the liberalization of trade and investment be completed by 2010 for the advanced member countries and by 2020 for the developing member countries. Within Asia, the Association of Southeast Asian Nations (ASEAN) has remained the symbol of regional economic cooperation. ASEAN was established in 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand to foster regional economic and political

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cooperation. Brunei became the sixth member in 1984 and Vietnam joined in 1995. Laos, Cambodia and Myanmar are expected to follow soon. Until now, ASEAN has played an important role in political cooperation, but has yet to achieve significant results in the sphere of economic cooperation. To cope with the rising tide of regionalism and to halt the shift of direct investment to the new competitors such as China, Latin America and East European countries, ASEAN has decided to establish an ASEAN Free Trade Area (AFTA) by 2003. By liberalizing trade in the region, AFTA should encourage a more horizontal division of labour in manufactured goods by making it more attractive for multinationals to build production networks across national borders. At the same time, Malaysia has proposed the establishment of an East Asian Economic Caucus (EAEC) as a way to bring about closer cooperation among the dynamic Asian economies. Given the new reality facing the Asian countries, this proposal seems reasonable, understandable and logical. The United States, however, strongly opposes the idea at the same time it is pushing hard to realize NAFTA. The objective of the US is clear: it wants to maintain its strong influence in Asia in terms of both economic and security issues. Washington is well aware that NAFTA is apt to have protectionist tendencies, at least during its early stages of development. If the EAEC were to become a reality, it would likely retaliate against any protectionist measures taken by NAFTA. The formation on NAFTA would probably not result in the imposition of higher tariffs on non-member countries. But non-tariff barriers such as country-of-origin rules, anti-dumping measures and efforts to expand US exports (such as the recent US demand that Japan set numerical targets on imports) would certainly increase. The United States must recognize that its economic hegemony has declined and that it cannot expect to maintain a free hand over every aspect of the global economy. It is wrong for Washington to inject security issues into a non-security equation. Similarly, Australia has been too impatient in its efforts to join the Asia-Pacific club. Because most other countries in the region view Australia as more European than Asian, it is difficult for them to accept Australia’s rapid and aggressive moves to share in the economic prosperity of Asia. One possible way to tie all these loose ends together is to restructure APEC to resemble the Organization for Economic Cooperation and Development (OECD) in terms of policy coordination, research and promotion of common economic interests. APEC should not become a single free-trade area and involve in security matters in the foreseeable future. Instead, the three free-trade areas should

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just be coordinated under the umbrella of APEC: NAFTA, representing Pacific America, AFTA, representing Pacific Asia, and another representing South Pacific nations like Australia, New Zealand and Papua New Guinea. Within Asia, the EAEC should be developed concurrently with AFTA. This will ensure that the free-trade-area concept is not confined just to ASEAN but extends to other dynamic economies in Asia as well. Furthermore, members of the European Union could participate in APEC as dialogue partners. This mechanism of economic cooperation, if successfully implemented, will be a great step toward a more closely integrated world economy in which regionalism and globalization become complementary forces rather than conflicting goals. If these steps are taken, economic integration in the Asia-Pacific region will become a reality rather than a myth. Such a major undertaking, however, will require the support of Japan and China and the understanding of the United States.

Notes 1 According to a survey by the Export–Import Bank of Japan (The Outlook of Japanese Foreign Direct Investment, January 1996), the share of Japanese companies operating in China that mainly target the local market rose from 45.5 per cent of the total in 1993 to 64.1 per cent in 1995. For companies planning to invest in China in 1995, this ratio rose further to 75.5 per cent. 2 In addition to the short-term fluctuation caused by the exchange-rate factor, the Asian NIEs’ share of Japanese exports has followed an upward trend, reflecting the growing share of the Asian NIEs in world imports (the market-size factor).

7

Conclusion Edward K. Y. Chen

The most remarkable phenomenon of Asian economic growth is not only the rapid growth rates of individual economics but also its sustainability and the way that rapid economic growth spreads throughout the region. This means that there is an important regional and international aspect of Asian economic growth. From this point of view, Asian economic dynamism can be explained on the basis of two virtuous circles of economic growth (in contrast to vicious circles experienced by many developing economies). The first is a domestic virtuous circle which explains how openness to foreign trade and investment gives rise to sustainable high rates of growth. The second is a regional virtuous circle which explains the diffusion of economic growth from one group of economies to another. The domestic virtuous circle model asserts that domestic policy reforms are required at the beginning of economic development. Such reforms will lead to the inflow of foreign direct investment (FDI) including technology and management skills which increase the competitiveness of domestic production. Such FDI is to a large extent trade-promoting rather than trade-substituting. The resulting increase in foreign trade gives rise to further increases in FDI and eventually a self-sustained high rate of economic growth. At the theoretical level, these economic knock-on effects could be explained by the positive effects of FDI on economic development in general, and by the FDItrade nexus on the basis of the networking of firms and industries in particular. The experience of the Southeast and East Asian countries shows that FDI could promote economic development. This experience is in contrast to that of Latin–American countries which suffered from 178

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increasing dependence on foreign resources and unemployment and underemployment of domestic resources in their utilisation of foreign capital. It seems that the crucial factor explaining such differences is not so much the country origin and types of TNCs that have gone to the developing countries. But such differences are mainly explained by the different development strategies and domestic economic environment of the host country. The domestic virtuous circle described above beside the strong empirical evidence provided by Asian economies has also to be supported by some theorisation related to the linkages between trade and FDI. For a long time, trade and direct investment were treated as substitutes in the sense that firms either exported to a market or invested there. However, the recent thinking is that trade and investment are to a large extent complementary in the sense that investment across borders promotes the flow of both imports and exports. One can even try to ask a quantitative question such as how much of an increase in trade flows could be expected from a $1 increase in investment flows? It is however necessary to further theorise the linkages between trade and investment at the microeconomic level. The trade-creation effects of investment could be discussed in the context of the networking of firms. Recently, there has been a growing economic literature on the nature and forms of networking among firms. Empirical evidences in the past indicate the prevalence of parentsubsidiaries relationships in networking in a vertical direction. This is particularly notable in the context of Chinese firms. The parent firms play a dominant and domineering role in their relationship with individual subsidiaries. This is the so called ‘hub and spokes’ relationship. Recent studies indicate that a ‘spoke and spoke’ relationship becomes increasingly prevalent. This means that increasingly subsidiaries network themselves with little or even no reference to the parent firm. This inter-affiliate relationship signifies a higher degree of autonomy enjoyed by the subsidiaries. The results is a wider spread of intra-firm networking and high degree of specialisation among subsidiaries. Today, a parent firm may set up many subsidiaries in one country or even in one place. Another recent observation is the increasing networking of firms which are themselves competitors. Competing firms may engage in cooperative arrangements such as research and development, supply of parts and components, and even exchange of marketing and scientific information. In the past, such inter-firm networking was only prevalent among firms with close cultural ties, notably among Chinese firms. The cultural affinity factor in this case contributes to lowering the transaction cost of networking. Today, the importance

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of cultural factor seems to have decreased. At the same time, interfirm networking has become less formal and less long term. Under such circumstances, there are greater uncertainties in their cooperative effort, however, a greater autonomy is maintained by the participating firms. The regional virtuous circle model is related to the sub-regional division of labour emerging in the Asian Pacific region in the context of the ‘flying geese’ models of industrialisation. In this process, FDI and trade play an important role. In the investing countries (usually countries at higher levels of economic development), the relocation of declining industries releases resources (labour and capital) for emerging industries, making it possible to upgrade the industrial structure. In the receiving countries (usually countries at lower levels of economic development), the inflow of foreign direct investment helps to introduce funds, management knowhow and technology needed for catching up with the industrial countries. While a virtuous circle of FDI and trade linkages occurs in individual economies, a virtuous circle of industrialisation exists at the regional level, in the course of economic development, countries undergo change in comparative costs. To maintain competitiveness at the domestic and international levels, firms have to relocate the production activities overseas through FDI. As a result, a sophisticated sub-regional division of industrial labour emerges, giving rise to the spreading of industrialisation throughout the region in accordance with the flying-geese pattern of industrial diffusion. Such a subregional division of labour makes a positive-sum game possible in export-oriented industrialisation. Earlier, it was believed that exportoriented industrialisation was a zero-sum game because of limited overseas markets and severe competition among exporting countries engaging in the production of similar manufactured products. A subregional division of industrial labour results in a harmonious trade and industrial development with more complementarity than competition. This pattern of industrial development in different economies within the region on the basis of this pattern gives rise to further changes in comparative advantage and therefore a continuous process of the regional virtuous circle. This to a large extent explains the unprecedented sustainability of Asian economic growth in the past three decades. The above account clearly demonstrates the instrumental role of sub-regional economic zones in making Asian economic success possible. The establishment of sub-regional economic zones facilitates the sub-regional division of labour which is crucial for the positivesum export orientation phenomenon in Asia. The formation of subregional economic zones also enhances intra-regional trade and invest-

CONCLUSION

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ment, and the role of FDI as a vehicle of economic growth. It has been argued in various places in this book that complementarity in factor inputs, geographical proximity in location, and export orientation in development strategy are essential conditions for the emergence of sub-regional economic zones. To sustain the success of a sub-regional economic zone, it is of course essential for factor complementarity to remain among members of the zone, though in the course of time such complementarity would probably have gone through dynamic changes. It is also essential that members of a zone derive mutual benefits from the cooperative activities. Distribution of benefits does not have to be equal but should not be too lopsided. In the end, the single most important factor which facilities the emergence of sub-regional economic zones and the continuing success of the existing zones is further economic cooperation and liberalisation (trade and investment) in the region. With the considerable achievements in the past few years in the activities of APEC, AFTA and WTO and the many unilateral economic and financial liberalisation measures undertaken by economies in the region, it is expected that Asia’s borderless economy will undergo deepening and broadening processes. Sub-regional economic cooperation will continue to be a driving force in Asia’s miraculous economic growth.

Index

Abdul Taib Mahmud, Tan Sri, 120 aerobatics model, 8–10 agrarian reform: Cambodia, 142; Laos, 141; Vietnam, 139–41; see also agriculture and economic development Agreement on Economic Cooperation in the Framework of the Development of the Riau Islands (IndonesiaSingapore), 99 Agreement on the Economic Cooperation in the Framework of the Development of Batam : (Indonesia-Singapore), Development of Batam and, 93; Development of the Riau Islands , 99 Agreement on the Promotion and Protection of Investments (Indonesia-Singapore), 99 agriculture and economic development: agro-based industries and, 84–5; Greater Mekong Subregional Economic Zone, in, 147 Angkor Wat (Cambodia), 149 Anhui Province (China), 50 anti-dumping measures, NAFTA and, 176 APEC see Asia-Pacific Economic Cooperation (APEC) Ariwibowo, Tunky, 105

ASEAN see Association of Southeast Asian Nations (ASEAN) ASEAN Free Trade Area (AFTA), 98, 176, 181 ASEAN Industrial Complementation Scheme, 97 ASEAN Industrial Joint Venture Scheme, 97 ASEAN Investment Guarantee Agreement, 99 Asia: 2, 28, 59, 152–77; capital inflows, 174; currency stability, 161, 172, 174; economic development, 171; economic growth, 153–4, 161–9; economic regional integration, 152, 174; European trade barriers and, 171; exchange-rate policies, 161, 172, 174; exports, 152, 155, 171, 172; FDI, 152, 154, 161–2, 168, 172, 174; frontier expansion, 152, 169; industrialization, 172; intra-regional interdependence, 152, 169; intra-regional trade and investment, 152, 154–5, 157–61, 169, 172, 174; Japan and, 152, 159–63, 168–9, 171, 173–4; multilateral governmental cooperation, 1, 2, 174; ODA debt repayment,

182

INDEX

183

163; OECD and, 153–4; private sector Economies (NIEs), Asian regional cooperation, 174; production Association of Southeast Asian Nations capacity expansion, 162; recession, (ASEAN): 2, 97, 176–7; AFTA and, 153; relocation of production to, 171; 98, 176; agro-based industries, 85; self-sustaining growth, 152–61; Asian NIEs and, 174; Cambodia and, technology transfer, 162; trade, 152, 20, 97–8, 150; China and, 82–3, 119, 169, 174; trade barriers, 171; trade 150, 157, 176; deregulation and imbalances, 159–60; trade liberalization, 5; EAGA, 134–5; liberalization policies, 161; US and, economic competition, 119, 157, 176; 152–3, 171; world trade share, 158; economic cooperation, 21, 87, 89–135, yen’s appreciation, 161–9, 171 175; economic development, 1, 4, 7; Asia-Pacific Economic Cooperation economic growth, 3, 138, 153, 164; (APEC): 175–7, 181; AFTA and, 176; exchange-rate, 172; export Australia and, 52, 176; EAEC and, competitiveness, 164; export 176; free trade areas, 176; NAFTA similarities with Asian NIEs, 174; and, 176; security and, 176; South exports, 97, 169, 170, 172, 174; flyingPacific nations and, 176; trade and geese model, 7; FDI and, 82, 119, 155, investment liberalization and, 175 157, 163–6, 169; GNP, 18; growth Asia-Pacific region: Asian NIEs and, 161; triangles and, 21, 89–135; Indonesia biotechnologies and, 9; economic and, 97, 175; Indochina and, 20, 139, integration, 176–7; economic 150; industrial restructuring, 8, 164; interdependence in, 1, 152, 169; intra-ASEAN economic cooperation, economy, 3–5; export dependence and, 21, 120; Japan and, 82, 155, 163–6, 159; FDI, 161; Greater Mekong 169, 170; JSR Growth Triangle and, Subregional Economic Zone and, 148; 52–3, 97–9, 121; Laos, 20, 150; Latin growth centre, as, 152–3; intra-regiona l America and, 176; Malaysia and, 97, trade, 158–9, 161; Japan and, 161; 175; market mechanisms, 138; market-size factor, 161; trade flows Myanmar and, 20; natural resources, and, 158; US and, 158, 161; world 83; NEA and, 86; Northern Growth trade growth and, 157 Triangle and, 21, 120; NIEs and, 155; Asian Development Bank (ADB): 75; OECD, 153; Philippines and, 97, 175; Greater Mekong Subregional Preferential Trading Arrangements, 97; Economic Zone and, 20, 136, 145, 147; primary commodity exports, 172; Indochina Economic Zone and, 136; regional economic cooperation and, Laos and, 149; Myanmar and, 150; 175–6; relocation of production to, Northern Growth Triangle and, 120; 164; Singapore and, 97–8, 111, 175; see also banking socialist countries and, 139, 150; Asian Newly Industrializing Economies Southeast Asian Community (NIEs) see Newly Industrializing

184

and, 150; subregional economic cooperation, 120; subregional zones, 89; Thailand, 97, 175; Vietnam and, 20, 119, 149–50, 175; world trade and, 157; yen-dollar rate, 163–4; 172; yen denominated debt, 164; see also Greater ASEAN Aung San Suu Kyi, 143 Australia, 3, 176; APEC and, 52, 176; coal, 84; outward investment, 52 Aziz, Datuk Seri Rafidah, 117 Baht Economic Zone, 149 Bangkok International Banking Facility (BIBF), 148–9 Bangladesh, 143 banking:13, 47–8, 62, 74, 105, 138, 143; Banking of East Asia, 48; Bank of Thailand, 148; BIBF, 148–9; Hong Kong Bank, 48; World Bank, 75, 155; see also Asian Development Bank (ADB) Barelang (Batam, Rempang, Galang), 119; see also Batam Island; Galang; Rempang Batam Industrial Park: 100, 105, 126; Singaporean role, 100, 102; see also Batamindo Industrial Park (BIP) Batam Island (Riau Islands, Indonesia): 101–6, 125–6; Agreement on the Economic Cooperation in the Framework of the Development of Batam (Indonesia, Singapore), 93, 99; development of, 96–7, 126–32; duty free zone, 99–101, 126; economic growth, 101–2, 105, 115; exports, 101, 105; foreign investment, 99, 101–3, 105, 117; foreign investment regulations liberalization, 99, 102; growth triangles and development, 21,

ASIA’S BORDERLESS ECONOMY

117, 124; industrial estate tax free zone status, 126; infrastructure development, 100–2; Johor-Indonesia bilateral relations, 117–18; JSR Growth Triangle, 89–90, 101–6, 117– 19; oil industries and, 101–2; population growth, 101; Singapore role in economic growth, 100, 102, 105, 112, 130–1; tourism and, 101–2, 104– 5, 117; see also Batam Industrial Park; Batamindo Industrial Park (BIP); Bintan Island; Indonesia; Riau Islands Batam Island Industrial Development Authority, 96, 101 Batamindo, developer of BIP, 132 Batamindo Industrial Park (BIP): 126–7, 129; foreign capital ratio, 130–2; foreign investment restrictions and, 130; infrastructure, 129–30, 132; investment companies, 129; labour force, 130; personnel cost, 129; smart cards for customs and immigration, 129 bilateral relations: China and, 76; EAGA and, 134–5; Indochina Economic Zone and, 20, 145; Indonesia-Singapore, 92– 3, 99, 111, 117–18, 124–5; Japan-Asia and trade imbalance, 159; JohorIndonesia, 117–18; Johor-Singapore, 92; JSR Growth Triangle and 92–3, 99, 117–18; Malaysia and, 117–18; Malaysia-Singapore, 99; NEA, in, 76– 83; Philippines-Singapore, 135; South Korea-North Korea, 19; Thailand, 20; water agreements, 92, 99 Bintan Beach International Resort, 101 Bintan Industrial Estate (BIE), 101, 132 Bintan Integrated Development Project, 100–1

INDEX

Bintan Island (Riau Islands, Indonesia): 100–1, 124–7; environment-orientated development of, 132–3; ferry service from Singapore, 133; growth triangles and economic development, 89–90, 118–19, 124; Indonesia-Singapore bilateral water agreement, 99, 111; industrial estate tax free zone status, 126; infrastructure development, 100; JSR Growth Triangle and, 118–19; tourism, 132–3; water resources, 99, 111, 133; see also Batam Island biotechnology, 8–9 border trade, 60, 69–72, 143, 148 borderless economy: Asia as, 2, 28, 59, 152–77; JSR Growth Triangle as, 90; see also new frontier expansion Brunei, 97, 175; EAGA and, 134–5 Buddhism, 147 Bulan Island (Riau Islands, Indonesia), 89– 90, 118 Burma see Myanmar Cambodia: 1, 137, 144, 147; agrarian reform, 142; ASEAN and, 20, 97–8, 150; capital, 142; conflict and civil war, 20, 97–8, 142; economic growth and development, 136–7, 142, 149; economic reform, 136, 142; foreign aid, 142, 149; FDI, 142; Greater Mekong Subregional Economic Zone benefits, 149; Indochina Economic Zone and, 20, 136; infrastructure, 142; Lon Nol Faction, 137; Mekong Committee, 144–5; Mekong River Commission and, 144–5; Paris Agreement 139, 142, 150; Pol Pot regime, 137, 144; tourism and, 149; UNTAC, 142; Vietnamese invasion,

185

137–9; see also Kampuchea capital: 5, 23–4, 33, 44–5, 169; accumulation, 7, 36, 60, 143; Asian NIEs, 59, 168; Cambodia, 142; China, 38–40, 44, 47, 49–50, 53, 73, 82–3; controls and deregulation, 93, 99; DPRK, 14; exports, 77–8, 81; flows, 3, 23–6, 46, 48, 65, 68, 73, 78, 83, 92, 174; foreign, 13–14, 16, 18, 49–50, 78, 99, 140, 143, 174; goods, 78, 81, 163; Greater Mekong Subregion, 147, 149; Hong Kong, 30, 35–6, 44, 53–5; horizontal exchange of (Japan-ROK), 78; internal, 147; Japan, 77–8, 81–3, 93, 174; JSR Growth Triangle and, 90, 92; Malaysia and, 99; markets, 170; ROK, 65, 68, 77–8, 81; Southern China, 38–40; stocks estimations, 54– 6; Taiwan, 36, 44, 53; Thailand, 147, 149; Vietnam, 14, 140 capital-intensive production: 21–2, 31, 36– 7, 43–4, 47, 53, 65, 68, 70, 130, 138, 164; see also Human Capital Intensive Goods (HCIG); Physical Capital Intensive Goods (PCIG) capital-labour ratio, 33, 35, 36 centrally planned economy: 4; DPRK, 14; Laos, 141; see also decentralization chemical industry, 7, 62, 87, 134; HCIs, 83, 87 China: 1, 13, 63; agro-based industries, 85; ASEAN and, 82–3, 119, 150, 157, 176; Asian NIEs and, 155–7; banking, 47; bilateral relations, 76; border trade, 69–72, 143, 150; capital, 38–40, 44, 47, 49–50, 53, 73, 82–3; Chinese Constitutional amendments, 13; coal, 84; Communist Party, 31; decentralization, 15; DPRK

186

and, 61, 70; economic growth and development, 1, 3–4, 11–13, 18, 31–2, 45, 61, 63, 138, 155; economic integration and, 82, 152, 154–7, 176–7; economic power, as, 155–7, 169, 175; economic reform, 11–14, 139, 155; see also Open Door Policy; energy, 84; exports, 12, 30, 32, 50, 65, 70, 163; flying-geese model and, 7; FDI, 12–14, 45–6, 50–2, 63–4, 77, 82, 108, 119, 148, 155, 157, 164, 167, 169; Fujian Province see Fujian Province; Gang of Four, 45; Gansu, 70; global economy and, 155, 157; Greater see Greater China; Guangdong Province see Guangdong Province; Guangzhou, 16, 47; Hainan Province, 28, 46–7; Heilongjiang Province, 51, 64, 70; Hong Kong and, 16–17, 28, 30, 45–50, 155, 157; Hong Kong sovereignty, 16– 17, 49, 157; industrialization, 53; Japan and, 52, 61, 64–5, 72, 76–9, 82–3, 155, 164–6, 169; Japan-ROK relations and, 81; Jilin Province see Jilin Province; labour, 16, 37–8; Liaoling Province, 64, 70; market economy, as, 12–14, 138, 155; Modernization Program, 45; monetary tightening, 165; Myanmar and, 70, 143, 150; NEA Economic Zone and, 15, 18, 59, 61, 76, 77, 86; Northeast, 18, 82–4, 86; Northern, 15, 83; Open Door Policy, 3, 12–13, 30–2, 45–6, 49, 69, 98, 150, 155, 157, 166–7; overseas Chinese investment, 83, 165; Pearl River Delta see Pearl River Delta Region; regional economic power, as, 155–7; regional government trade initiatives, 69–72, 86; ROK and, 19,

ASIA’S BORDERLESS ECONOMY

60–8, 76–7; Russia and, 18, 70, 76; services sector, 47; Shandong, 64; Shanghai, 28, 50, 64; Shatou, 45; Shenzhen, 16, 45–7; Singapore and, 112, 171; Sino-Soviet relations, 18; Sino-Vietnam War, 137; South China Economic Zone (SCEZ), 16, 18, 28, 45–51, 53; Southern, 31–4, 37–41, 44, 46, 53, 82–3, 85–7, see also South China Economic Zone (SCEZ); Special Economic Zone , 16, 45–6; Taiwan and, 18, 44, 49, 68–9, 155, 157; technology transfer, 166–7; Tiananmen Square, 62, 82; tourism and, 86; trade initiatives, and, 69–72, 86; TRADP and, 72–6; Vietnam and, 70, 137, 149– 50; world trade and, 155, 157; Xiamen, 16, 45; Xinjiang Uygur Autonomous Region, border trade, 70; Yangtze region, 49–51; `Yellow Sea Economic Zone’, 19; yen’s appreciation and, 163, 165; Yunnan Province see Yunnan Province, see also Chinese Economic Area; Greater China; South China Economic Zone (SCEZ) Chonjin and Rajin Free Economic and Trade Zone, 68 Chua Jui Meng, 108 Chuan Leekpai, 120 Cintanakaan Mai (Laos), 139, 141 Club Mediterranean (France), 133 Cold War: 1, 2, 98, 145; Indochinese economic cooperation and, 136; Korean Peninsula structure and, 60; NEA Economic Zone and, 86; ROK initiative and, 61; subregional economic zone development and, 119; Vietnam

INDEX

and, 136; see also socialist countries collectivization, Laos, 138; Vietnam, 139 Common Market, 48 communism: 136–7; global decline of, 138; see also domino theory; socialist countries comparative advantage: 5–10, 45, 181; Hong Kong, 35–6, 44; indicators of, 5– 6; Japan and, 171; shifting and flyinggeese model, 5–7; Southern China, 40; Taiwan, 37, 44; see also economic complementarity; Revealed Comparative Advantage (RCA) competition: China, in, 13; developing countries, among, 164; Eastern Europe and ASEAN countries, 119, 157, 176; growth triangles and, 119; Japan-ROK relations, 78–82; Japanese investment, for, 163; SCEZ and Growth Triangle and, 53 competitors, networking among, 179–80 complementarity, economic see economic complementarity container ports, world ranking, 157 cooperation, economic see economic cooperation Council for Mutual Economic Assistance (CMEA), 138, 141 country-of-origin rules, NAFTA and, 176 cultural and ethnic ties: ASEAN and, 97; cultural affinity factor, networking, 180; Greater Mekong Subregional Economic Zone and, 143, 147 currency fluctuations, 161–9, 172–4; see also dollar; yen-dollar rate; yen’s appreciation Customs Union, 48 Dalian (China), 82, 86–7 Davao (Philippines), 89

187

debt, yen-denominated, 161, 163–4 decentralization: 2–3, 15–16; political power, of, 2–3; China, 15; Japan, 16; ROK, 15; Russia, 15; special economic zones and, 16 Democratic People’s Republic of Korea (DPRK) (North Korea): 1, 15, 60, 76, 86, 155; agro-based industries, 84; capital, 14; China and, 61, 70; economic reform, 14–15, 155; foreign capital, 14; foreign investment, 77; GNP, 14; HCIs and, 83; inter-Korea cooperation, 68–9; Japan and, 14, 69, 72; Japan-ROK relations and, 81; natural resources, 84; NEA Economic Zone and, 15, 18, 59, 61; nuclear development, 14–15, 68; open-door policies, 60, 63–4; Rajin-Sonbong area development, 69; ROK and, 14, 18–20, 61–2, 68–9; Russia, 63–4; tourism and, 86; TRADP and, 60, 69, 73–6; US and, 14; see also Korea; Republic of Korea (ROK) (South Korea) democratization movements, Myanmar, 138 Deng Xiaoping, 69 deregulation and liberalization: APEC and, 175; ASEAN and, 5; see also economic liberalization detente, cooperation across national borders and, 10 Dhanabalan, Suppiah, 120 direct investment see foreign direct investment (FDI); investment diversity, of economic systems, 3, 7 division of labour: 5–10; AFTA and, 176; ASEAN, 87; Fujian Province, 47; Guangdong Province, 47; Guangzhou, 47; growth triangles and, 135; Hainan, 47; industrialization

188

and, 7, 9–10, 44–5; Japan, 171; JapanROK, 81–3, 87; Mongolia, 81; NEA, 81–3, 87; Pearl River Delta, 47; regional virtuous circle model and, 180; SCEZ, 44–5, 47; Shenzhen, 47; Southern China, 87; specialization and, 45; sub-regional, 180–1; Zhejiang Province, 47 Doi Moi policy (Vietnam), 14, 139–41 dollar, Asian exchange rate policy and, 161, 172; see also currency fluctuations; yen-dollar rate domino theory: 10, 136–7; reverse domino effect, 10–11, 21, 136–9, 143, 155 drug trafficking, 148 dumping, NAFTA anti-dumping measures, 176 Dutch disease, 17, 24–5 East ASEAN Growth Area (EAGA), 134–5; see also Association of Southeast Asian Nations (ASEAN) East Asia: 178–9; export market, as, 170; Greater Mekong Subregional Economic Zone and, 147; industrialization and global environment, 169, 170, 171; investment in, 170 East Asian Economic Caucus (EAEC), 176 East Kalimantan see Kalimantan Eastern Bloc countries, 12, 138 economic complementarity: 2, 9–10, 45, 93, 180–1; exploitation gains of, 10–11, 21–3; factor inputs, 181; Greater Mekong Subregional Economic Zone in, 143; Hong Kong and SCEZ, 32–3; Japan-ROK relations and, 78–82; JSR Growth Triangle and, 92, 117; Riau Islands development, 125; South China

ASIA’S BORDERLESS ECONOMY

Economic Zone (SCEZ) and, 28–30, 44–5; Southern China, 32–3, 44, 53; Taiwan, 32–3, 44 economic cooperation: 10, 134–5, 180–1; APEC and, 175–7; ASEAN and, 21, 87, 89–135, 175–6; complementarity and, 10; Greater Mekong Subregion and, 136, 145–9; growth triangles and, 21, 89; Hong Kong and China, 16, 28, 45–6; Indochina, 136, 143; Indochinese socialist countries and, 20; Indonesia-Singapore, 93, 111, 125–6; JSR Growth Triangle, 98–100, 119; Japan and Far East Russia, 19; Korea, in, 19, 68–9; Laos, 147, 149; Malaysia, 93, 99, 134; Mekong River and, 136, 143–5, 147; multilateral, 1, 2, 61, 174– 7; NEA Economic Zone and, 15, 18– 19, 59–61, 86; Philippines, 135; private sector regional, 174; Riau Islands, 93, 99, 120, 124–5, 134–5; ROK, 62–3, 68–9, 78–9; Russia, 1, 15, 18–19, 63; SCEZ and, 16, 30–4, 45–9, 53, 148; Singapore, 105–6, 111, 120, 135; socialist countries, 20, 136; Taiwan and China, 49; Thailand and, 148; Vietnam, 20; see also comparative advantage; division of labour; economic complementarity economic development: 3–4, 7, 171; aerobatics model, 8–10; Asian NIEs, 1, 4; Cambodia, 149; diversity and, 3; domestic virtuous circle model, 178–9; flying-geese model, 5–10; Hong Kong, 3, 4, 30–1; Indonesia, 3–4; Japan, 3–4; Johor, 108, 119; JSR Growth Triangle, 124; Karimun Islands (Indonesia), 118, 125, 133–4; Laos, 149; Malaysia, 4, 119;

INDEX

Myanmar, 143, 150; NEA Economic Zone, 83–7; regional virtuous circle model, 180; Riau Islands (Indonesia), 89–90, 105–6, 118–19, 124–35; Singapore, 3; Taiwan, 31; Vietnam, 149; Yunnan Province, 150 economic growth: 3, 10, 98, 118, 153–4, 161–9, 172; ASEAN, 3, 138, 153, 164; Asian NIEs, 3, 32, 138, 153, 163, 164; Cambodia, 136–7, 142; China, 1, 3–4, 11–13, 18, 31–4, 45, 61, 63, 138, 155; China and Open Door Policy 31; domestic virtuous circle model, 178–9; growth triangles, 118–19; Guangdong Province, 31–2; Hong Kong, 16, 17; Indonesia, 93; Johor, 106–111; Laos, 137–8, 141; Malaysia, 93, 106, 163, 165; Myanmar, 138, 143; NEA Economic Zone, 61; OECD, 153, 154; open economies and, 3; regional virtuous circle model, 180; Riau Islands, 100–2, 105, 112, 115, 130–1; SCEZ, 46–51, 53; Singapore, 93–5, 163; sustainability, 181; US, 154, 158; Vietnam, 14, 137; yen appreciation and, 161, 163 economic integration: 174, 176–7; China, 82, 152, 154–7, 176–7; growth triangles, 118, 123; Hong Kong and China, 16–18, 155, 157; Indochina and regional, 143; Korea, 19, 59; NEA Economic Zone, 60, 61, 86; socialist countries, 11; SCEZ and, 48–9; Taiwan, 155; US, 176–7; Vietnam and, 149 economic interdependence: Asia-Pacific region, 1, 152, 169; intra-ASEAN, 97– 8; Pan-Pacific, 161; Singapore, 97–8 economic liberalization: 5, 99, 102, 143, 161, 171, 175, 180–1, AFTA and, 176;

189

APEC and, 175; Batam Island, 99, 102; Indonesia, 93, 163; Laos, 141; Malaysia, 93, 99, 106, 108; Myanmar, 143; ROK, 5; Taiwan, 5; Vietnam and, 139–41; see also open door policy; trade liberalization economic reform: Cambodia, 136; 142; China and, 11–14, 139, 155; DPRK, 14–15, 155; Greater Mekong Subregional Economic Zone, 139, 147; Indochina, 139–43; Laos and, 141–2; market mechanisms and, 139, 142, 147; Myanmar, 139, 142–3; Russia, 12, 63; Vietnam, 139–41; see also open-door policies economic systems, Asian differences, 2–5 Economic Union, 48 economic zones, subregional see subregional economic zones electronics industry, 7, 81, 105, 125 energy: 84–5, 170; Asian NIEs and, 84; China, 84; East Asian industrialization and, 169; Greater Mekong Subregion projects, 20, 145, 147; Japan, 81, 84; Korea Energy Development Organization (KEDO), 68; Mekong River, 144; NEA Economic Zone, 84, 86; Northern Growth Triangle, 120; ROK, 81, 84; Russia, 84; Thailand, 149; TRADP and, 72 environment, degradation: 148–9; management, 145–6; protection, 84, 147 ethnic and cultural ties: ASEAN and, 97; cultural affinity factor, networking, 180; Greater Mekong Subregional Economic Zone and, 143, 147 Europe, Eastern: 138, 174, 176; Eastern Bloc countries, 12, 138;

190

investment in Asia, 174; Japanese exports and yen appreciation, 168–9; trade barriers, 171 European Union: APEC and, 177; Generalized System of Preferences (GCP) (Indonesia) and, 126 exchange rates: Asian policies, 161, 169, 172, 174; fluctuations, 161, 174; Hong Kong, 17, 25; global realignment of, 152; Vietnam, 140; see also currency fluctuations; dollar; yen export competitiveness: ASEAN and, 164; Asian, 162; Asian NIEs, 32, 162–4, 168; Japan, 162, 168–9; Korea, 163; Malaysia, 163–5; ROK, 164–5; Singapore, 163; Taiwan, 163, 172, 174; Thailand, 163; yen’s appreciation and Asian, 161, 164; yen-dollar rate and, 162–3 export dependence, Asia-Pacific region, 159 export orientation (EO), 31, 181 exports: 3, 5–6, 45; ASEAN, 97, 169–70, 172, 174; Asian, 152, 155, 171–2; Asian market for, 170; Asian NIEs, 32, 168, 174; Batam Island, 101, 105; capital, 77–8, 81; China, 12, 30, 32, 50, 65, 70, 163; economic growth and, 3, 12; Hong Kong, 16–18, 30, 41, 112; Indochina, 139; Indonesia, 93, 126; Japan, 78, 159, 160, 168–70; Korea, 172, 174; Laos, 149; Malaysia, 93, 107; market diversification, 155; Myanmar, 143; NAFTA and, 176; NEA, 71, 84–5; Philippines, 163; ROK, 62, 65; Taiwan, 18, 31, 43, 172, 174; US, 158–9, 161, 176; Vietnamese rice, 141; see also export competitiveness

ASIA’S BORDERLESS ECONOMY

factor endowments: Hong Kong, 33–6, 44; SCEZ and, 30, 34–40, 44; Southern China, 34, 37–40, 44; subregional economic zones, in, 45, 181–2; Taiwan, 33–4, 36, 44, 108 Federation of Hong Kong Industries, 50 firms, networking among, 179–80 flying-geese model of industrialization: 2, 5–10; industrial specialization and new technology, 8; product life cycle and, 8; reverse domino effect and, 11; shifting comparative advantage and, 5– 7; sub-regional division of labour and, 180, 181 foreign capital see foreign direct investment (FDI) foreign direct investment (FDI): 3, 5, 7, 10, 21–3, 178, 179, 180, 181; ASEAN countries and, 82, 119, 155, 157, 163– 6, 169; Asia and, 152, 154, 161–2, 168, 172, 174; Asia-Pacific region, 161; Australian, 52; Cambodia, 142; China and, 12–14, 45–6, 50–2, 63–4, 77, 82, 108, 119, 148, 155, 157, 164, 167, 169; DPRK and, 14; Greater Mekong Subregional Economic Zone and, 148; India, 148; Indochinese states and, 136, 139; Japan, 52, 64, 77–8, 82, 93, 105, 108, 155, 161–3, 165–8, 171, 174; Japanese capital inflows, 78, 174; JSR Growth Triangle, 52; Laos and, 141–2, 149; Malaysia, 106, 108, 119, 163–4; Myanmar and, 143, 150; NIEs, 155, 164–6, 169, 174; Northeast Asia, 77; Open Door Policy (China), 45–6; policy reforms and, 178; ROK, 77–8; SCEZ, 50–1, 53; restrictions by developed countries, 171; Thailand and Japanese, 78; US, 50–1, 161,

INDEX

174; trade and, 178, 179, 180, 181; Vietnam and, 108, 119, 140–1; virtuous circle model and, 179–81; Yangtze region and, 50–1; yen’s appreciation and, 161–4; see also foreign investment foreign investment: Batam, 99, 101–3, 105, 117; DPRK, 77; growth triangles and competition, 119; Indonesia, 93, 105, 108, 119, 163; Johor State, 100, 108; JSR Growth Triangle, 100–1, 117; Malaysia, 106, 108; Malaysian regulations and, 93; NEA, 105, 106; product life cycle hypothesis and, 8; Singapore, 105, 108, 112, 117; Taiwan, 93, 105; Thailand, 78; Yangtze region, 50; see also foreign direct investment (FDI) France, 147 free-market system, 5 free-trade area: 176–7; APEC and, 176; ASEAN and, 176–7; SCEZ, 48 free-trade system, 171 friction, trade, 152, 155, 169–70 frontier expansion, new see new frontier expansion ‘Four Dragons’, 59 Fujian Province (China): capital, 38–40; capital stocks, 55; division of labour, 47; economic growth, 32; GDP, 32; GNP, 18; labour, 37; South China Economic Zone (SCEZ), 18, 28; Special Economic Zone, 45, 46 Fukui (Japan), 71–2 Galang (Indonesia), 118, 119 Galang Baru (Indonesia), 118 Gang of Four, fall of 45 Gansu (China), 70 Garuda airline (Indonesia), 119 Generalized System of Preferences (GCP),

191

126 geographical proximity and subregional economic zones: 2, 9, 46, 181; Greater Mekong Subregional Economic Zone and, 143; Hong Kong and, 46, 50; Johor (Malaysia), 108; JSR Growth Triangle and, 92, 117; SCEZ and, 46, 50, 53; Singapore, 108; South China, 46; Taiwan, 46 Germany, 19–20, 68 global economy: 3, 176; Asia-Pacific region and, 3, 152–3; China and, 155, 157; production and technologies in, 8; trade friction, 152 Goh Chok Tong, 20, 89, 124 government economic policy: 45–6, 178; coordination and APEC, 176; deregulation and liberalization, 5; Doi Moi (Vietnam), 14, 139–41; economic, 171; economic restructuring, 106; exchange-rate policy, 161, 169, 172, 174; industrial, 169–72; import liberalization and trade, 161; investment and trade, 152, 157–61; ‘Nordpolitik’ (ROK), 62–3, 68; political factors and, 45–6; SCEZ and, 45–6; trade, 161, 169–72; yen’s appreciation and, 169–77; see also open door policy; Open Door Policy (1978, China) Greater ASEAN, 15; see also Association of Southeast Asian Nations (ASEAN) Greater China, 52, 155–6; see also China ‘Greater Hong Kong’, 28; see also South China Economic Zone (SCEZ) Greater Mekong Subregion, 20, 136, 144–8; projects, 145–7; see also Greater Mekong Subregional Economic Zone; Indochina Economic Zone Greater Mekong Subregional

192

Economic Zone: 143–51; agriculture and economic development, 147; Cambodia and, 149; cultural and ethnic ties, 147; economic reform, 139, 147; environmental issues, 147–8; FDI and, 148; industrialization of Indochinese states, 150; Laos and, 149; Myanmar and, 150; Vietnam and, 149; Yunnan Province and, 150 Gross Domestic Product (GDP) see specific country, province or city Gross National Product (GNP), 3–4; see also under specific countries and provinces growth triangles: 15, 20–1, 134, 135, 143; competitive advantage and, 119; Southern Growth Triangle, 89; see also Johor-Singapore-Riau (JSR) Growth Triangle; Northern Growth Triangle Guangdong Province (China): 2, 31–2; capital, 38–40; capital stocks, 55; division of labour, 47; export growth, 32; GDP, 31; GNP, 18, 31; Hong Kong investment and, 50; labour, 37; SCEZ and, 18, 28; Special Economic Zone, 16, 45–6 Guangzhou (China), 16, 47

ASIA’S BORDERLESS ECONOMY

rates, 17, 25; factor endowments, 33–6, 44; GDP/GNP, 17, 29–31; Greater Mekong Subregional projects and, 145; Indonesia and, 93; industrial restructuring, 171; labour, 33–6; laissez-faire capitalism and, 4; land, 35; Malaysia and, 93; Revealed Comparative Advantage (RCA), 41–3; SCEZ, 2, 15–18, 21, 28, 30–3, 44, 46– 9, 53, 59, 86, 111–12; services sector, 48, 53; Sino-British Co-ordinating Committee on Major Cross-Border Infrastructure, 49; sovereignty to China, 16–17, 49, 157; Special Economic Zones and, 16; Taiwanese exports and, 18; Vietnam and, 20; see also Chinese Economic Area; Greater China; South China Economic Zone (SCEZ) Hubei Province (China), 50 Human Capital Intensive Good (HCIG): Hong Kong, 41–2; Taiwan, 42–3 human resources development, Greater Mekong Subregional projects, 145 Hunan Province (China), 50

import costs, 161–4, 171 import liberalization, 143, 161, 171 Habibie, B.J., 96 import substitution (IS), 3, 6, 8, 31, 74, 78 Hainan Province (China), 28, 46–7 imports, 5, 6, 25, 30, 63, 65, 68, 70–1, 78, heavy and chemical industries (HCIs), 83, 81, 84–5, 99, 107, 139, 149, 157–9, 86 168, 171, 172, 176 Heilongjiang Province (China), 51, 64, 70 India, 147, 148 Hong Kong: 3–5, 17–19, 25, 30–2, 44; Indochina: 136, 140; ASEAN membership, capital, 30, 35; capital stocks, 54–5; 150; economic reform, 139–43; FDI, China, 16–17, 28, 30, 45–50, 155, 157; 136, 139; regional integration and comparative advantage, 35–6, 44; cooperation, 136, 143–4; reverse Dutch disease and, 24–5; economic domino effect, 136–9; US military complementarity, 32–3; exchange intervention in,

INDEX

137; see also Cambodia; Greater Mekong Subregional Economic Zone; Laos; Vietnam Indochina Economic Zone, 20, 136–51 Indonesia: 3–4; Agreement on Economic Cooperation (Indonesia-Singapore), 93, 99; ASEAN and, 97, 175; Badam Koordinasi Pananaman Modal (BKPM, Investment Co-ordinating Board), 99; bilateral agreements, 92–3, 99, 111, 117–18, 124; coal, 84; economic liberalization and growth, 93, 163; foreign investment, 93, 105, 108, 119, 163; GSP, 126; Garuda airline, 119; Northern Growth Triangle and, 21, 134; Salim Group, 100; Singapore and, 93, 99–100, 102, 105–6, 111–12, 125– 6; water agreements, 92, 111; yendenominated debt, 163; see also Batam Industrial Park; Batamindo Industrial Park (BIP); Batam Island (Riau Islands, Indonesia); Batam Island Industrial Development Authority; Bintan Island (Riau Islands, Indonesia); Johor-Singapore-Riau (JSR) Growth Triangle; Riau Islands (Indonesia) industrial development: aerobatics model of, 9–10; flying-geese model of, 2, 5– 10, 11 industrial policy, industrialized countries in, 169–72 industrial restructuring: 5–6, 7; Asia and, 172; global, 169, 170, 171; Hong Kong and market mechanisms, 171 industrialization, 2, 5–10, 169–72, 180; China, 33, 53; division of labour and, 7, 9–10, 44–5, 180; Indochinese states and ASEAN, 150; Japan, 3, 8; Laos, 141; Malaysia, 164; ROK, 78;

193

Vietnam, 141; virtuous circle model of, 180 industrialized countries: Asian economic growth and, 153; Myanmar and, 143; trade and industrial policies, 169–72; see also Newly Industrializing Economies (NIEs), Asian inflation: exchange rate policy and output trade-off, 172; Laos, 141; Myanmar, 143; Taiwan, 141 information technology, 8, 86 international investment, 3, 18 international markets, 168 international trade, 3, 18, 152 intra-regional trade, 76, 148, 152, 154–5, 157–9, 161, 172, 174 investment, foreign direct see foreign direct investment (FDI); foreign investment; international investment investment and trade: Asian intra-regional, 157–61; projects, 145; policies, 152 investment liberalization, 175; see also economic liberalization Japan: 1–4, 15, 97, 157, 168; agro-based industries and, 85; ASEAN and, 82, 155, 163–6, 169, 170; Asia and, 152, 159–60, 168–9, 171, 174; Asia-Pacific economic integration and, 176–7, Asian NIEs and, 168; BIP and, 130–1; border trade, 71–2; China and, 52, 61, 64–5, 72, 76–9, 82–3, 155, 164–6, 169; comparative advantage and, 171; division of labour, 171; DPRK and, 14, 69, 72; economic policy, 171; economic power, as, 169, 175; energy and, 81, 84; Europe and, 171; export competitiveness, 162, 168, 169; flyinggeese model and, 7; FDI, 52, 64, 77–8, 82, 93, 105, 108, 155, 161–3,

194

ASIA’S BORDERLESS ECONOMY

165–8, 171, 174; GNP, 31; Greater China tourism, 108, 117; water agreements, and, 52, 155; HCIs, 83; Indonesia and, 92, 111 93, 105; industrialization spread and, 3, Johor State Economic Development 8; Johor and, 108; JSR Growth Corporation, 106 Triangle and, 52; Malaysia and, 93, Johor-Singapore-Riau (JSR) Growth 108; market structure, 78–9, 81; Triangle: 15, 21, 51–3, 59, 89–121, national security, 171; NEA and, 6–2, 124, 134; AFTA and, 98; ASEAN and, 64, 76; NEA Economic Zone and, 15, 52–3, 97–9, 121; bilateral relations 18, 59, 64; ODA, 163; production and, 92–3, 99, 117–18; competitive facility relocation, 161, 171; regional advantage, 92, 119; duty-free zones, government initiatives, 69–72, 86; 99–101; economic benefits, 92, 101– ROK and, 61, 72, 76–82, 86; Russia 17; economic complementarity, 92, and, 18–19, 61, 72, 76; Southeast Asia 117; economic cooperation, 98–100, and, 62; technology exporting and, 81; 119; economic development, 124; FDI, Thailand and, 78; tourists, as, 86; trade 52; geographic proximity effects, 92, barriers and, 171; trade imbalances, 117; infrastructure development, 100– 159–60; TRADP and, 75–6; 1; private sector role, 92, 98–101; unemployment, 168; US and, 159, 171; public sector role, 92, 98–101; Riau Vietnam and, 14, 20, 149; yen’s Islands, 51, 101–6, 118–20, 124, 135; appreciation and, 152, 161–9, 171 Sarawak and, 120; Singapore and, 100, Japan External Trade Organization, 165 102, 105–6, 108, 111–12, 117; social Japan Sea Economic Zone, 71–2 and political management, 92, 117–18; Jiangsu Province (China), 50 SCEZ and, 51–3; water agreements, Jiangxi Province (China), 50 92, 93 Jilin Province (China): agro-based Joint Committee on Business Cooperation industries, 84–5; border trade, 70; (Malacca-Singapore), 119 ROK and, 64; TRADP and, 72 Jurong Environmental Engineering (JEE), Johor State (Malaysia): economic 100, 129, 132 development, 108, 119; economic growth, 106–111; economic Kalimantan, East: 134–5; Sarawakrestructuring, 95–6; foreign Kalimantan-Singapore subregional investment, 100, 108; GDP, 93, 106; economic zone, 120–1; West, 134–5 Indonesia and, 117; infrastructure, 100, Kampuchea, Democratic: 137; People’s 106, 111; JSR Growth Triangle and, Republic of, 137; see also Cambodia 21, 51, 89–90, 106–11, 117, 119, 124, Kanazawa (Japan), 71–2 134; Malaysia- Singapore bilateral Karimun Industrial Complex (KIM), 133 agreements, 99; Malaysian states and, Karimun Islands (Indonesia): 125–6; 107; Riau Islands and, 134; Singapore ASEAN and growth and, 93, 106–8, 111–12, 117, 134;

INDEX

triangles, 89–90; economic development, 118, 125, 133–4; JSR Growth Triangle, 89–90, 118, 124; oil and chemical industries, 133–4; ship industries, 133– 4 Kim Il Sung, 15, 74 Kim Jong Il, 15 Kim Yong-Sam, 68 Kintetsu Group (Japan), 133 Korea: 93, 145, 163, 172, 174; inter-Korea cooperation, 19, 68; see also Democratic People’s Republic of Korea (DPRK) (North Korea); Republic of Korea (ROK) (South Korea) Korea Energy Development Organization (KEDO), 68 Korea Trade Promotion Corporation (KOTRA), 68 Kuala Lumpur (Malaysia), 106 Kuomintang Party (Taiwan), 31 labour: 33, 35–6; BIP, 130; China, 16, 37– 8; division of see division of labour; Hong Kong, 33–6; SCEZ, 16; Taiwan, 36; ULIG, 41–3 laissez-faire capitalism 4, 37 land: China Open Door Policy and, 45; Hong Kong, 35; Taiwan, 37 Lao People’s Revolutionary Party, 141 Laos: 1, 137, 138, 141, 147; ASEAN and, 20, 150; border trade, 70, 150; Cintanakaan Mai (New Economic Mechanism), 139, 141; economic cooperation and development, 147, 149; economic growth and socialism, 137–8, 141; economic reform, 141–2; environmental degradation, 149; FDI, 141–2, 149; Greater Mekong Subregional Economic Zone, 149; hydroelectric power exports, 149;

195

Indochina Economic Zone and, 20, 136; industrialization, 141; inflation, 141; infrastructure, 142; market economy transformation, 136, 141; Mekong River and, 144, 147; Mekong River Commission and, 145; Mekong Committee, 144; privatization, 141; Thai-Lao Friendship Bridge, 149; Thailand and, 149; Theun-Hinboun hydro-power project, 145; tourism, 141, 149; trade, 149; see also Indochina Latin America: 83, 176, 178–9; importsubstitution strategy and, 3 Lee Kuan Yew, 97, 99, 124 Liaoling Province (China), 64, 70 liberalization, economic see economic liberalization Lim Boon Heng, 119 Macau, 16, 28 macroeconomic interdependence, Pacific region, in, 152 macroeconomic performance: Japan, 168; new frontier expansion and, 24–5; JSR Growth Triangle, 111; Singapore and, 111 macroeconomic stability, Indochina and, 139 Mahathir bin Mohamad, 120 Malacca (Malaysia), 119 Malaysia: ASEAN and, 97, 175; EAEC and, 176; economic cooperation, 93, 99, 134; economic development, 4, 119; economic growth, 93, 106, 163, 165; economic liberalization, 93, 99, 106, 108; economic restructuring policies, 106; export competitiveness, 163–5; FDI, 106, 108, 119, 163–4; growth triangles, 21, 89–135; industrialization and,

196

164; Japan and, 163; JSR Growth Triangle, 15, 59, 117, 119; Northern Growth Triangle and, 21, 89, 120, 134; Singapore and, 93, 106–7, 111; tax incentives for foreign investment, 108; tourism, 107–8; yen’s appreciation, 163–5; yen-denominated debt, 163 Malaysian Institute of Economic Research, 93 Manado (Indonesia), 89 Maritime Southeast Asia Economic Zone, 21 market economy: 10; Cambodia, 142; China, 12–14; 138, 155; Greater Mekong Subregional Economic Zone, 147; Indochinese states, 136, 139; Laos, 136, 141; Myanmar, 136, 139, 143; SCEZ, 48–9; Vietnam, 14, 136, 139–41 market-size factor, Asia-Pacific region, 161 Mekong Committee, 144, 145; see also Greater Mekong Subregional Economic Zone; Mekong River Commission Mekong River: dams and electricity plants, 144; subregional economic cooperation and, 136, 143–4, 147; sustainable development of basin, 145; see also Greater Mekong Subregional Economic Zone Mekong River Commission, 145; see also Mekong Committee Mindanao (Philippines), 134–5 Moluccas (Indonesia), 134–5 Mongolia: 1; border trade, 70; China and, 70; free economic zones, 74; HCIs and, 83; Japan and, 81; NEA Economic Zone and, 59, 61, 76; ROK and, 81; Russia and, 77; TRADP and, 73–6

ASIA’S BORDERLESS ECONOMY

Muhyiddin Yassin: Tan Sri, 117 multilateral cooperation, 1–2, 61, 169, 174–7 Myanmar: 1, 20, 138, 143, 150; ASEAN and, 20; Bangladesh and, 143; border trade, 70, 143, 150; China and, 70, 143, 150; democratization movements, 138; economic development, 143, 150; economic growth, 138, 143; economic liberalization, 143; economic reform, 139, 142–3; FDI, 143, 150; Greater Mekong Subregional Economic Zone, 145, 147, 150; Indochina Economic Zone and, 70, 136; market economy, 136, 139, 143; Mekong River and, 144, 147; oil and gas exploration, 143; privatization, 143; SLORC, 138, 142– 3; State Enterprise Law, 143; Thailand and, 143; tourism, 143 National Congress of the Chinese Communist Party, 14th, 12–13 nationalization: Laos, 138; Myanmar, 138; see also privatization Natural Economic Territories (NETs), 92 natural resources: ASEAN, 83; DPRK, 84; Latin America, 83; Myanmar, 150; NEA Economic Zone, 83–4; northeast China, 83–4; Russia, 83, 84 Ne Win, 138 Nepal, 70 networking among firms, trade and investment and, 179–80 new frontier expansion: 10–16, 21–5; Asia, 152, 169; Asia’s borderless economy, 152–77; Dutch disease and, 24–5; Hong Kong, 25; macroeconomic performance and, 24–5; regional cooperation and, 10; socialist countries and, 152;

INDEX

subregional economic zones and, 2–3, 21–5; Taiwan and, 25; see also border trade new technologies, 8–9 New Zealand, 176 Newly Industrializing Economies (NIEs): ASEAN and, 155; Asian, 2, 8, 31, 59, 157, 161, 174; China and, 155–7; economic development, 1, 4; economic growth, 3, 32, 138, 153, 163–4; energy, 84; exchange rates, 161, 164, 172; export competitiveness, 32, 162–4, 168; flying-geese model and, 7; FDI, 155, 164–6, 169, 174; Japan and, 164– 6, 168–9, 172, 174; market mechanisms, 138; OECD and, 153; production facility relocation, 161, 180; US and, 158–9, 171; US and European trade barriers, 171; Vietnam and, 149; wages, 164; world trade and, 157; yen’s appreciation and yen-dollar rate, 161–4, 168; yen-denominated debt and, 163 Niigata (Japan), 71–2 ‘Nordpolitik’ initiative (ROK) and, 61–9 Norodom Sihanouk, King of Cambodia, 142 North America, 174; see also United States of America (US) North American Free Trade Association (NAFTA), 98, 176; APEC and, 176; non-tariff barriers and, 176; US exports and, 176 North Korea see Democratic People’s Republic of Korea (DPRK) (North Korea); see also Korea; Republic of Korea (ROK) (South Korea) Northeast Asia (NEA): 60; border trade with, 71–2; foreign investment, 105, 106; Indonesia and, 105; Malaysia and,

197

106 Northeast Asia (NEA) Economic Zone: 15, 18–20, 59–87; agro-based industries, 84–5; Cold War and, 60, 86; economic cooperation, 15, 18–19, 59–61, 86; economic development, 83–7; economic integration, 60–1, 86; energy resources, 84, 86; HCIs, 83, 86; infrastructure, 86; Japan-ROK and, 78– 82; natural resources, 83–4; structure, 61–76; tourism, 85–6; TRADP and, 19, 61, 72–6; ‘Yellow Sea Economic Zone’, 19 Northern Growth Triangle, 21, 89, 120, 134 nuclear development: China, 84; DPRK, 14–15, 68 official development assistance (ODA) (Japan), 163 oil and gas industries, Batam Island, 101–2; Karimun Islands, 133–4; Myanmar, 143; Singapore, 134 Olympic Games (Seoul 1988), 61 open door policy: China, 3, 12–13, 30, 32, 45–6, 49, 69, 150; China-Taiwan trade, 69; DPRK and, 60, 63–4; Indochinese states, 139; socialist countries and, 21; Yunnan Province, 150 Open Door Policy (China), 3, 12–13, 30–2, 45–6, 49, 69, 98, 150, 155, 157, 166–7 open economic systems: 2, 3; DPRK, 14; flying-geese model and, 7; Greater Mekong Subregional Economic Zone, 147; see also market economy Organization for Economic Cooperation and Development (OECD): 78, 153–4, 176; economic growth rate desynchronization, 153–4; GDP, 30

198

Pacific region, 152, 155, 175, 176; see also Asia-Pacific region Pahang (Malaysia), 119 Pakistan, 70 Papua New Guinea, 176 Paris Agreement 139, 142, 150 Pearl River Delta Region (China): division of labour and, 47; Hong Kong and, 111; SCEZ and, 28, 111; Special Economic Zone expansion, 46 Penang (Malaysia), 106, 134 People’s Republic of China see China People’s Republic of Kampuchea, 137; see also Cambodia People’s Republic of Korea, Democratic see Democratic People’s Republic of Korea (DPRK) (North Korea) People’s Republic of Laos, 137; see also Laos perestroika, 19 Petrochemical Corporation of Singapore, 134 Philippines: ASEAN and, 97, 175; Davao, 89; economic cooperation, 135; economic development, 3–4; economic growth, 163; Japan and, 163; Northern Growth Triangle and, 89; Singapore and, 135; yen-denominated debt, 163 Physical Capital Intensive Goods (PCIG), 42, 43 planned economy see centrally planned economy Plaza Accord, 1, 161, 163 Pol Pot regime (Cambodia), 137, 144 policy, government see government economic policy political power, decentralization of, 2–3, 15–16 price controls, 12 price subsidies, 14 privatisation: Cambodia, 142; China, 14; Laos, 141; Myanmar, 143; see also

ASIA’S BORDERLESS ECONOMY

nationalization product life cycles, 8 production: globalization of, 8; relocation of, 16, 18, 41, 106, 111, 161, 164, 171, 180; see also Revealed Comparative Advantage (RCA) protectionism: 161, 171; NAFTA and nontariffs, 176 Public Utilities Board (PUB) (Singapore), 133 Pulau Keebil (Karimun Islands, Indonesia), 133 Pulau Mudu (Karimun Islands, Indonesia), 133 Pulau Pinang (Malaysia), 106 Rafidah Aziz, Datuk Seri, 117 Ramos, Fidel, 134 recession, 45, 153 regional cooperation concept, 10, 134–5, 174; see also economic cooperation regionalism, 158, 176–7 Rempang (Indonesia), 118, 119 Republic of Korea (ROK) (South Korea): 59; agro-based industries, 85; China and, 19, 60–8, 76–7; decentralization, 15; deregulation and liberalization, 5; DPRK and, 14, 18–20, 61–2, 68–9; economic cooperation, 62–3, 68–9; 78–9; economic development, 4; economic policy, 171; energy, 81, 84; exchange-rate, 172; export competitiveness, 164, 165; export similarities with Japan, 172, 174; FDI, 77–8; GNP, 14; Greater Mekong Subregional projects and, 145; HCIs, 83; Indonesia and, 93; industrial relocation, 171; industrialization, 78; inter-Korea cooperation, 19, 68–9; Japan and, 61, 76–82, 86; Japan-DPRK trade and,

INDEX

69; Malaysia and, 93; market structure and growth, 78–9, 81; most-favoured nation (MFN) status, 62; ‘Nordpolitik’, 61–3, 68; NEA Economic Zone and, 15, 18, 59–60, 76; overseas investment restrictions, 171; Russia and, 18, 61–3, 65–8; socialist countries and, 62; technology, 63, 81; tourism, 86; trade expansion and diversification, 62–3; TRADP and, 73, 75–6; ‘Yellow Sea Economic Zone’, 19; yen-dollar rate, 163; yen’s appreciation and, 164–5; see also Democratic People’s Republic of Korea (DPRK) (North Korea); Korea research and development (R&D): 63, 72, 171, 180; APEX and, 176 Revealed Comparative Advantage (RCA): Hong Kong, 41–3; South China Economic Zone (SCEZ), 41–3; Taiwan, 42–3 Riau Islands (Indonesia): 125; Agreement on Economic Cooperation Development of the Riau Islands (Indonesia, Singapore), 93, 99; economic cooperation, 93, 99, 120, 124–5, 134–5; economic development, 105–6, 118–19, 124–35; growth triangle, 21, 89–90; IndonesiaSingapore bilateral agreements and, 93, 99, 124–5; JSR Growth Triangle, 51, 101–6, 118–20, 124, 135; Singapore and, 105–6; socio-political issues, 118; see also Batam Island; Bintan Island; Karimun Islands Roh Tae Woo, 61 Russia: 63, 86; agro-based industries, 84–5; border trade, 70; China and, 18, 70, 76; coal, 84; decentralization, 15; economic cooperation, 1, 15, 18–19,

199

63; economic reform, 12, 63; energy, 84; free economic zones, 74; Japan and, 18–19, 61, 63, 76; Kuril Islands dispute (Russia-Japan), 18; MFN status and, 62; Mongolia and, 77; natural resources, 83, 84; NEA Economic Zone and, 15, 18, 59, 76; perestroika, 19; ROK and, 62; Sino-Soviet relations, 18; tourism, 86; TRADP and, 74–6 Sabah (Malaysia), 134–5 Sakhalin (Far East Russia), 19 Salim Group, 126, 130, 132 Sandakan (Malaysia), 89 Sarawak (Malaysia), EAGA and, 134–5; JSR Growth Triangle and, 120 Sarawak-Kalimantan-Singapore subregional economic zone, 120–1 Sato, Mitsuo, 147 Savang Vatthana, Sri, King of Laos, 137 Saw Maung, 138, 143 Selangor (Malaysia), 106 Sembawang Group, 133 Seoul Olympics 61 Shandong Province (China), 64 Shanghai (China), 28, 50, 64 Shatou (China), 45 Shenzhen (China): division of labour, 47; Special Economic Zones and, 16, 45– 6; SCEZ and, 47 Sijori see Johor-Singapore-Riau (JSR) Growth Triangle Singapore, Agreement on Economic Cooperation (Indonesia-Singapore): 93, 99, 124; ASEAN and, 97–8, 111, 175; Batam Island and, 100, 102, 105, 112, 130–1; Bintan Island and, 133; China and, 112, 171; EAGA and, 135;

200

ASIA’S BORDERLESS ECONOMY

economic cooperation, 105–6, 111, 120, ASEAN and, 139, 150; China model 135; economic development, 3; and, 150; CMEA, 138; Eastern Bloc, economic growth and, 93–5, 163; 15, 138; economic cooperation, 20, economic interdependence, 97–8; 136; economic integration, 11; flyingeconomic restructuring, 112; foreign geese patterns and, 7; Greater ASEAN investment, 105, 108, 112, 117; GNP, and, 15; growth triangles and, 21; 31; Greater Mekong Subregional Indochinese, 15, 20, 136–9, 141, 150; projects and, 145; growth triangles industrialized countries and, 139; intraand, 21, 89–135, 171; Indonesia and, regional interdependence, 152; new 92–5, 99, 105–6, 111, 124; industrial economic frontiers and, 152; reverse relocation, 93, 111–12; Johor and, 92, domino phenomenon and, 10 106, 108, 111; JSR Growth Triangle, socialist market economy, China as, 13–14, 15, 21, 51, 59, 89–135, 111–17, 120, 138, 155; see also market economy; 124; Malacca (Malaysia), 119; open economic systems Malaysia and, 106–8, 111, 119; oil South China Economic Zone (SCEZ): 2, refining base, 134; Philippines and, 15–18, 21, 28–55, 59, 143; banking, 135; Riau Islands and, 125–6; 47; China and, 16, 18, 28, 45–51, 53; Sarawak-Kalimantan-Singapore Chinese-Taiwanese hostility, 49; subregional economic zone, 120–1; complementarity and comparative tourism, 107–8, 117, 133; water advantage, 28–30, 34, 41–6, 53; agreements, 92, 111; workforce, 117; cultural and ethnic similarity and, 46; yen-dollar rate and, 163 division of labour, 44–5, 47; economic Singapore Government-Linked Companies cooperation, 16, 30–4, 45–9, 53, 148; (GLCs), 100 economic growth, 46–51, 53; Singapore Manufacturer’s Association, 112 economic integration, 48–9; factor Singapore Public Utilities Board, 99 endowments, 30, 34–40, 44; FDI, 50– Singapore Technologies Industrial 1, 53; geographical expansion, 46–8; Corporation (STIC), 100, 129, 132 geographical proximity and, 46, 50, 53; Sino-British Co-ordinating Committee on government policies, 45–6; growth Major Cross-Border Infrastructure, zones and, 53; Hainan, 28; Hong Kong Hong Kong, 49 and, 18, 47, 50, 86; ‘Hong Kong Sino-Soviet relations, 18 effect’, 47; NEA and, 53; political Sino-Vietnam War, 137, 139 factors and, 45–6; RCA and, 41–3; skills-intensive products, 44; see also Special Economic Zones and, 16; Unskilled Labour Intensive Goods Yangtze region and, 49–51; see also (ULIG) China; Hong Kong; Southern China smart cards, 129, 132 South Korea see Republic of Korea (ROK) smuggling, 148 (South Korea); see also Democratic socialist countries: 4–5, 138, 152, 155; People’s

INDEX

Republic of Korea (DPRK) (North Korea); Korea South Pacific nations, 176; see also AsiaPacific region; Pacific region Southeast Asia: 178–9; domino theory, 136–7; Greater Mekong Subregional Economic Zone and, 147 Southeast Asian Community, concept, 150 Southern China: 86; agro-based industry and, 85; capital, 38–40; comparative advantage of, 40; economic complementarity, 32–3, 53; economic growth, 31–4; export growth, 32; factor endowments, 34, 37–40, 44; GDP, 32; geographical proximity and SCEZ, 46; Hong Kong and, 38, 41; industrial complementarity, 44; industrial relocation to, 38, 41; industrialization program, 33; Japan and, 82–3; labour, 37–8; SCEZ and, 32–3, 46, 53; services sector expansion, 48; Taiwan and, 38; see also China; Hong Kong; South China Economic Zone (SCEZ) Southern Growth Triangle, 89 Soviet Union: 19, 62, 138; Cambodia and, 142; ROK and, 18; see also Russia Special Economic Zones: 16, 19–20, 45–6; decentralization, 16; expansion, 46 State Law and Order Restoration Council (SLORC) (Myanmar), 138, 142–3 subregional economic zones: 1–25, 119, 174, 180–1; ASEAN and growth triangles, 21, 89–135; complementarity of countries within, 45, 93, 181; decentralization and, 2–3, 15–16; flying-geese patterns of, 2–3; geographical proximity and, 2, 9, 46; growth triangles, 21, 89–135;

201

industrialization and, 8–9; infrastructure development, 93; new frontier expansion, 21–5; resources development, 93; see also Chinese Economic Area; Greater Mekong Subregional Economic Zone; Indochina Economic Zone; Japan Sea Economic Zone; Johor-Singapore-Riau (JSR) Growth Triangle; Northeast Asia (NEA) Economic Zone; Northern Growth Triangle; South China Economic Zone (SCEZ); Special Economic Zones subsidiary companies, networking, 179 subsidies, price, 14 Suharto, Thojib, N.J., 99, 120, 124 Sulawesi (Indonesia), 134–5 Sumatra, northern (Indonesia), 89, 120, 134 sustainable development, Mekong River Basin, 145; see also environment Taiwan: 19, 25, 32; capital, 36, 44, 53; China and, 18, 44, 49, 68–9, 155, 157; China-Taiwan hostility, 44, 49; comparative advantage, 37, 44; deregulation and liberalization, 5; economic development, 31; economic growth, 163; economic integration, 155; EO, 31; exchange rate, 172; export competitiveness, 163, 172, 174; factor endowments, 33–4, 36, 44, 108; foreign investment, 93, 105; GNP, 31; Greater Mekong Subregional projects and, 145; Hong Kong and, 18, IS, 31; Indonesia and, 93, 105; industrial complementarity, 32–3, 44; industrialization, 31; Johor and, 108; Kuomintang Party, 31; labour, 36; land, 37;

202

Malaysia and, 93, 108; inflation, 25; RCA, 42–3; SCEZ and, 2, 18, 28, 32– 3, 46–9, 53, 59; services sector expansion, 48, technology industries and, 53; tourism and, 86; Vietnam and, 20; yen-dollar rate, 163; yendenominated debt and, 163; see also Chinese Economic Area; Greater China Tanah Merah Ferry Terminal, 133 tariffs, 171, 176 tax, concessions, 16, 45, 126; incentives, 108 technology: biotechnology, 8, 9; Cambodia and, 142; Japan-ROK cooperation, 78; ‘leapfrogging’, 9, product life cycles and, 8; transfer of, 105, 162 Technology Intensive Goods (TEIG): 41–3; DRAM semiconductors, 81 telecommunications, 145 Thai-Lao Friendship Bridge (Mekong River), 149 Thailand: 70, 148–9; ASEAN and, 97, 175; Baht Economic Zone and, 149; economic cooperation and development, 148; economic growth, 163; energy, 149; export competitiveness, 163; foreign investment, 78; GNP, 148; Greater Mekong Subregion, 147–8; Indochina and, 20, 150, 171; Indochina Economic Zone and, 20, 136; Japan and, 78, 163; Laos and, 149; Mekong River and, 144–5; Mekong River Commission and, 145; Myanmar and, 143; Northern Growth Triangle and, 21, 89, 120, 134; Thai-Lao Friendship Bridge, 149; Vietnam and, 20; yen’s appreciation, 163 Than Shwe, 143

ASIA’S BORDERLESS ECONOMY

Theun-Hinboun hydro-power project (Laos), 145 Tiananmen Square 62, 82 Tibet Autonomous Region, 70 tourism, 85–6, 101–2, 104–5, 107–8, 117, 132–3, 141, 143, 149 Toyama (Japan), 71–2 trade: 180; Asian intra-regional, 152; FDI and, 179; industrial structure changes and, 7; Malaysia-Singapore, 107; world, 157, 158 trade and investment policies: 152; intraregional, 157–61 trade friction, 152, 155, 169–70 trade imbalances, 159, 160, 170 trade liberalization: 5, 99, 102, 143, 161, 175, 181; AFTA and, 176, 181; APEC and, 175, 181; ASEAN, 5; Batam Island, 99, 102; Indonesia, 93; Laos, 141; Malaysia, 93, 99, 106, 108; Myanmar, 143; Nordpolitik (ROK) and, 62–3, 68; ROK, 5; Taiwan, 5; Vietnam and, 139–41; see also economic liberalization trade policies: Asia-US asymmetric, 161; industrialized countries and, 169–72; see also government economic policy trade wars, 171; see also trade friction transportation costs, SCEZ and, 46–7 transportation and infrastructure projects: Greater Mekong Subregional and, 145, 146 Tumen River Area Development Project (TRADP): 19, 60–1, 68–9, 72–7, 86; sub-projects, 72; UN and, 19, 60, 72–5 United Nations: Cambodia and, 142; Cambodian peace agreement 139, 142, 150; development programs, 19, 60, 72–5; Mekong

INDEX

Committee, 144; North Korean membership, 14; South Korean membership, 14; UNTAC, 142; Vietnamese withdrawal from Cambodia, 137–8 United Nations Development Program (UNDP): TRADP and, 19, 60, 72–5 United Nations Transitional Authority in Cambodia (UNTAC), 142 United States of America (US): 1, 3, 97, 152, 161, 174, 176–7; Asian exchange rates and dollar fluctuations, 172, 174; Asian exports and, 152; Bintan Island resort, 133; DPRK and, 14; economic growth, 153, 158; economic integration, 176–7; economic power decline, 152, 154–5; exports, 158–9, 161, 176; FDI, 50–1, 161, 174; Greater China and, 155; GSP and, 126; Hong Kong and, 16; industrial structure, 8; intra-regional trade and, 158–9, 161; Japan and, 159, 168–9; military intervention in Indochina, 137; NAFTA and, 176; Northeast Asia (NEA) Economic Zone and, 59, 61; protectionism and trade policies, 161, 171; SCEZ and, 50–1; security issues, 176; trade barriers, 171; trade deficit, 158, 172; trade embargoes, 137, 141; trade imbalance, 159; TRADP and, 76; Vietnam and, 14, 137, 141, 149; world trade and, 157–8; yen’s appreciation and, 168–9 Unskilled Labour Intensive Goods (ULIG): 41–2, 43 Vietnam, 1, 147, 149–50; agrarian reform, 139–41; ASEAN and, 20, 119, 149–50, 175; Asian NIEs and, 149; border trade, 70, 150; Cambodia and, 137–9;

203

China and, 70, 137, 149–50; CMEA and, 141; Cold War and, 136; Doi Moi (renovation) policy, 14, 139–41; domino theory and, 10, 136; economic cooperation, 20; economic development, 149; economic growth, 14, 137; economic reform, 139–41; exchange rate, 140; Five-Year Plan, 137, 139; foreign capital investment law 140; FDI, 108, 119, 140–1; GDP, 141; global economic integration, 149; Greater Mekong Subregional Economic Zone, 20, 149; hyperinflation rate, 141; Indochina Economic Zone and, 20, 136; Indochinese political hegemony and, 149; industrialization, 141; Japan and, 149; market economy, 14, 136, 139– 41; Mekong Committee, 144; Mekong River, 144–5, 147; Mekong River Commission and, 145; open economy, as, 98, 155; rice exports, 141; SinoVietnam War, 137, 139; State Committee for Cooperation and Investment, 141; Thailand and, 20; US and, 14, 137, 149; US trade embargo, 14, 137, 141; Vietnamese boat people, 137; Yunnan Province, 150 Vietnam War, 20, 137, 144 virtuous circle model of economic development, 178–80 water, agreements: 92, 99, 111; resources project, 133; use and management, 144–5 West Kalimantan see Kalimantan World Bank, 75, 155 world economy see global economy world trade, 155, 157–8 World Trade Centre (Singapore), 133

204

World Trade Organization (WTO), 182 Xiamen (China), 16, 45 Xinjiang Uygur Autonomous Region, 70 Yangtze region (China): 49–51; FDI, 50–1; GNP, 50; Zhejiang Province, 28, 47, 50 ‘Yellow Sea Economic Zone’, 19 yen bloc, 152 yen-dollar rate: 174; Asian economic growth and, 162, 172; Asian export competitiveness, 162; Japanese direct investment and, 162; Japanese exports to Asian NIEs, 168

ASIA’S BORDERLESS ECONOMY

yen’s appreciation: 161–9; import costs and, 162–3; ODA debt repayment and, 163; policy implications of, 169–77 Yunnan Province (China): Greater Mekong Subregional Economic Zone and, 145, 147; Indochina Economic Zone and, 136; Kunming open-door policy and, 150; Laos and, 70, 150; Mekong River and, 144, 147; Myanmar and, 70, 150; open-door policy and, 150; Vietnam and, 70, 150 Zhejiang Province (China), 28, 47, 50 Zhuhai Special Economic Zone (China), 16, 45