Post-decentralization regional economies and actors -- putting the capacity of Local governments to the test

Decentralization in Indonesia was introduced institutionally in 2001, with a democratization drive promoted by international donors and by the intention of the new government to clear away the centralistic image of Soeharto. Decentralization has had some effects on regional economies and on local government administration. Compared to the period before decentralization, the share of gross regional domestic product and local government finance has increased in Java, though investment and bank borrowing have expanded to the outer islands. In qualitative aspects, decentralization has transferred not only administrative authority but also many new vested interests from the center to regions. Local governments have become more extensive economic actors in regional economies. Regional economic actors now compete actively for such vested interests and have missed the opportunity to create market-friendly regional economies. The government sector should not be a mere rent-seeking economic actor, but should play a role as a facilitator promoting private sector activities in regional economies.

Fiscal Decentralization, Chinese Style: Good for Health Outcomes?

This study analyzes the effect of fiscal decentralization on health outcomes in China using a panel data set with nationwide county-level data. We find that counties in more fiscal decentralized provinces have lower infant mortality rates compared to those counties in which the provincial government retains the main spending authority, if certain conditions are met. Spending responsibilities at the local level need to be matched with county government's own fiscal capacity. For those local governments that have only limited revenues, their ability to spend on local public goods such as health care depends crucially upon intergovernmental transfers. The findings of this study thereby support the common assertion that fiscal decentralization can indeed lead to more efficient production of local public goods, but also highlights the necessary conditions to make this happen.

Distribution System of China's Industrial Clusters: Case Study of Yiwu China Commodity City

This paper discusses the issue of upgrading industrial clusters from the perspective of external linkages. It is taken for granted that in most developing countries, due to the limited domestic market and poor traditional commercial networks, industrial clusters are able to upgrade only when they are involved in global value chains. However, the rise of China’s industrial clusters challenges this view. Historically, China has had a lot of industrial clusters with their own traditional commercial networks. This fact combined with its huge population resulted in the formation of a unique external linage to China’s industrial clusters after the socialist planning period ended. In concrete terms, since the 1980s, a traditional commercial institution . the transaction market . began to appear in most clusters. These markets within the clusters get connected to those in the cities due to interaction between traditional merchants and local governments. This has resulted in the formation of a powerful market network-based distribution system which has played a crucial role for China’s industrial clusters in responding to exploding domestic demand. This paper explains these features in detail, using Yiwu China Commodity City as a case study.

Forestry Sector Reform and Distributional Change of Natural Resource Rent in Indonesia

After the collapse of the centralized Soeharto regime, deforestation caused by over-logging accelerated. To tackle this problem, an IMF/World Bank-led forestry sector reform program adopted a market-friendly approach involving the resumption of round wood exports and raising of the resource rent fee, with the aim to stop rent accumulation by plywood companies, which had enjoyed a supply of round wood at privileged prices. The Indonesian government, for its part, decentralized the forest concession management system to provide incentives for local governments and communities to carry out sustainable forest management. However, neither policy reform worked effectively. The round wood export ban was reimposed and the forest management system centralized again with cooperation from a newly funded industry-led institution. In the midst of the confusion surrounding the policy reversal, the gap between the price of round wood in international and domestic markets failed to contract, although rent allocations to plywood industries were reduced during 1998-2003. The rents were not collected properly by the government, but accumulated unexpectedly in the hands of players in the black market for round wood.

The Flowchart Model of Cluster Policy: The Automobile Industry Cluster in China

This paper proposes a general model of the flowchart approach to industrial cluster policy and applies this model to Guangzhou's automobile industry cluster. The flowchart approach to industrial cluster policy is an action plan for prioritizing policy measures in a time-ordered series. We reached the following two conclusions. First,we clarified the effects of Honda, Nissan, and Toyota on agglomeration in Guangzhou's automobile industry cluster. Second, we established that local governments play a crucial role in successful industrial cluster policy, and that the mayor of the local government should be offered incentives in order to target industrial clustering and implement cluster policy.

Decentralization in Nation State Building of Indonesia

Introduction：Today, many countries, regardless of developed or developing, are trying to promote decentralization. According to Manor, as his quoting of Nickson’s argument, decentralization stems from the necessity to strengthen local governments as proxy of civil society to fill the yawning gap between the state and civil society (Manor [1999]: 30). With the end to the Cold War following the collapse of the Soviet Union rendering the cause of the “leadership of the central government to counter communism” meaningless, Manor points out, it has become increasingly difficult to respond flexibly to changes in society under the centralized system. Then, what benefits can be expected from the effectuation of decentralization? Litvack-Ahmad-Bird cited the four points: attainment of allocative efficiency in the face of different local preferences for local public goods; improvement to government competitiveness; realization of good governance; and enhancement of the legitimacy and sustainability of heterogeneous national states (Litvack, Ahmad & Bird [1998]: 5). They all contribute to reducing the economic and social costs of a central government unable to respond to changes in society and enhancing the efficiency of state administration through the delegation of authority to local governments. Why did Indonesia have a go at decentralization? As Maryanov recognizes, reasons for the implementation of decentralization in Indonesia have never been explicitly presented (Maryanov [1958]: 17). But there was strong momentum toward building a democratic state in Indonesia at the time of independence, and as indicated by provisions of Article 18 of the 1945 Constitution, there was the tendency in Indonesia from the beginning to debate decentralization in association with democratization. That said debate about democratization was fairly abstract and the main points are to ease the tensions, quiet the complaints, satisfy the political forces and thus stabilize the process of government (Maryanov [1958]: 26-27). 　　　What triggered decentralization in Indonesia in earnest, of course, was the collapse of the Soeharto regime in May 1998. The Soeharto regime, regarded as the epitome of the centralization of power, became incapable of effectively dealing with problems in administration of the state and development administration. Besides, the post-Soeharto era of “reform (reformasi)” demanded the complete wipeout of the Soeharto image. In contraposition to the centralization of power was decentralization. The Soeharto regime that ruled Indonesia for 32 years was established in 1966 under the banner of “anti-communism.” The end of the Cold War structure in the late 1980s undermined the legitimate reason the centralization of power to counter communism claimed by the Soeharto regime. The factor for decentralization cited by Manor is applicable here. 　　　Decentralization can be interpreted to mean not only the reversal of the centralized system of government due to its inability to respond to changes in society, as Manor points out, but also the participation of local governments in the process of the nation state building through the more positive transfer of power (democratic decentralization) and in the coordinated pursuit with the central government for a new shape of the state. However, it is also true that a variety of problems are gushing out in the process of implementing decentralization in Indonesia. 　　　This paper discusses the relationship between decentralization and the formation of the nation state with the awareness of the problems and issues described above. Section 1 retraces the history of decentralization by examining laws and regulations for local administration and how they were actually implemented or not. Section 2 focuses on the relationships among the central government, local governments, foreign companies and other actors in the play over the distribution of profits from exploitation of natural resources, and examines the process of the ulterior motives of these actors and the amplification of mistrust spawning intense conflicts that, in extreme cases, grew into separation and independence movements. Section 3 considers the merits and demerits at this stage of decentralization implemented since 2001 and shed light on the significance of decentralization in terms of the nation state building. Finally, Section 4 attempts to review decentralization as the “opportunity to learn by doing” for the central and local governments in the process of the nation state building. 　　　In the context of decentralization in Indonesia, deconcentration (dekonsentrasi), decentralization (desentralisasi) and support assignments (tugas pembantuan; medebewind, a Dutch word, was used previously) are defined as follows. Dekonsentrasi means that when the central government puts a local office of its own, or an outpost agency, in charge of implementing its service without delegating the administrative authority over this particular service. The outpost agency carries out the services as instructed by the central government. A head of a local government, when acting for the central government, gets involved in the process of dekonsentrasi. Desentralisasi, meanwhile, occurs when the central government cedes the administrative authority over a particular service to local governments. Under desentralisasi, local governments can undertake the particular service at their own discretion, and the central government, after the delegation of authority, cannot interfere with how local governments handle that service. Tugas pembantuan occur when the central government makes local governments or villages, or local governments make villages, undertake a particular service. In this case, the central government, or local governments, provides funding, equipment and materials necessary, and officials of local governments and villages undertake the service under the supervision and guidance of the central or local governments. Tugas pembantuan are maintained until local governments and villages become capable of undertaking that particular service on their own.

Measuring Fiscal Decentralization in the Philippines

This paper focuses on the fiscal decentralization in the Philippines after the 1991 Local Government Code. It first examines the intergovernmental fiscal relationship between central and local governments by using fiscal decentralization indicators, and then investigates its impact on local finance. After fiscal decentralization, the local expenditure responsibility is expanded while the local fiscal capacity is not strengthened in the Philippines. Local governments consequently comes to depend heavily on fiscal transfers from the central government, internal revenue allotments (IRAs), which has a substantial influence on local finance. The heavy dependence on IRAs makes local finance unpredictable and unstable. The distribution of IRAs also affects the horizontal balance between provincial governments.

The Technology Gap and the Growth of the Firm: A Case Study of China's Mobile-phone Handset Industry

We have examined the way in which local Chinese firms confronted with a technology gap have achieved growth, using the Chinese handset industry as a case study. Chinese local firms have lacked technology, and have therefore turned to outside firms for development, design, and manufacturing, while they themselves have focused on sales and marketing, using their advantage of familiarity with the Chinese market. Consequently, by establishing a growth condition in which their selection of boundaries counterbalances the technology gap they have been able to expand their market share in comparison with foreign firms.

Yangtze River Delta's system integration: institutional barriers and countermeasures

This paper addresses the issue of institutional barriers to the Yangtze River Delta integration and the resulting slow development. It analyzes the problems including the coordination of local interests and regional interests, market segmentation during the regional integration, competition for the local government‘s investment on the public goods, labor movement within the delta. The paper argues that to reduce the negative impacts of these barriers and to promote the further integration of the Yangtze Delta region, the central government should strengthen the coordination between local governments, regulate their disorderly competition and reform the official evaluation system.

Chapter 8 Location Choice of Japanese Multinationals: Country Characteristics or Region Characteristics?

In the present global era in which firms choose the location of their plants beyond national borders, location characteristics are important for attracting multinational enterprises (MNEs). The better access to countries with large market is clearly attractive for MNEs. For example, special treatments on tariffs such as the Generalized System of Preferences (GSP) are beneficial for MNEs whose home country does not have such treatments. Not only such country characteristics but also region characteristics (i.e. province-level or city-level ones) matter, particularly in the case that location characteristics differ widely between a nation's regions. The existence of industrial concentration, that is, agglomeration, is a typical regional characteristic. It is with consideration of these country-level and region-level characteristics that MNEs decide their location abroad. A large number of academic studies have investigated in what kinds of countries MNEs locate, i.e. location choice analysis. Employing the usual new economic geography model (i.e. constant elasticity of substitution (CES) utility function, Dixit-Stiglitz monopolistic competition, and ice-berg trade costs), the literature derives the profit function, of which coefficients are estimated using maximum likelihood procedures. Recent studies are as follows: Head, Rise, and Swenson (1999) for Japanese MNEs in the US; Belderbos and Carree (2002) for Japanese MNEs in China; Head and Mayer (2004) for Japanese MNEs in Europe; Disdier and Mayer (2004) for French MNEs in Europe; Castellani and Zanfei (2004) for large MNEs worldwide; Mayer, Mejean, and Nefussi (2007) for French MNEs worldwide; Crozet, Mayer, and Mucchielli (2004) for MNEs in France; and Basile, Castellani, and Zanfei (2008) for MNEs in Europe. At the present time, three main topics can be found in this literature. The first introduces various location elements as independent variables. The above-mentioned new economic geography model usually yields the profit function, which is a function of market size, productive factor prices, price of intermediate goods, and trade costs. As a proxy for the price of intermediate goods, the measure of agglomeration is often used, particularly the number of manufacturing firms. Some studies employ more disaggregated numbers of manufacturing firms, such as the number of manufacturing firms with the same nationality as the firms choosing the location (e.g., Head et al., 1999; Crozet et al., 2004) or the number of firms belonging to the same firm group (e.g., Belderbos and Carree, 2002). As part of trade costs, some investment climate measures have been examined: free trade zones in the US (Head et al., 1999), special economic zones and opening coastal cities in China (Belderbos and Carree, 2002), and Objective 1 structural funds and cohesion funds in Europe (Basile et al., 2008). Second, the validity of proxy variables for location elements is further examined. Head and Mayer (2004) examine the validity of market potential on location choice. They propose the use of two measures: the Harris market potential index (Harris, 1954) and the Krugman-type index used in Redding and Venables (2004). The Harris-type index is simply the sum of distance-weighted real GDP. They employ the Krugman-type market potential index, which is directly derived from the new economic geography model, as it takes into account the extent of competition (i.e. price index) and is constructed using estimators of importing country dummy variables in the well-known gravity equation, as in Redding and Venables (2004). They find that "theory does not pay", in the sense that the Harris market potential outperforms Krugman's market potential in both the magnitude of its coefficient and the fit of the model to be estimated. The third topic explores the substitution of location by examining inclusive values in the nested-logit model. For example, using firm-level data on French investments both in France and abroad over the 1992-2002 period, Mayer et al. (2007) investigate the determinants of location choice and assess empirically whether the domestic economy has been losing attractiveness over the recent period or not. The estimated coefficient for inclusive value is strongly significant and near unity, indicating that the national economy is not different from the rest of the world in terms of substitution patterns. Similarly, Disdier and Mayer (2004) investigate whether French MNEs consider Western and Eastern Europe as two distinct groups of potential host countries by examining the coefficient for the inclusive value in nested-logit estimation. They confirm the relevance of an East-West structure in the country location decision and furthermore show that this relevance decreases over time. The purpose of this paper is to investigate the location choice of Japanese MNEs in Thailand, Cambodia, Laos, Myanmar, and Vietnam, and is closely related to the third topic mentioned above. By examining region-level location choice with the nested-logit model, I investigate the relative importance of not only country characteristics but also region characteristics. Such investigation is invaluable particularly in the case of location choice in those five countries: industrialization remains immature in those countries which have not yet succeeded in attracting enough MNEs, and as a result, it is expected that there are not yet crucial regional variations for MNEs within such a nation, meaning the country characteristics are still relatively important to attract MNEs. To illustrate, in the case of Cambodia and Laos, one of the crucial elements for Japanese MNEs would be that LDC preferential tariff schemes are available for exports from Cambodia and Laos. On the other hand, in the case of Thailand and Vietnam, which have accepted a relatively large number of MNEs and thus raised the extent of regional inequality, regional characteristics such as the existence of agglomeration would become important elements in location choice. Our sample countries seem, therefore, to offer rich variations for analyzing the relative importance between country characteristics and region characteristics. Our empirical strategy has a further advantage. As in the third topic in the location choice literature, the use of the nested-logit model enables us to examine substitution patterns between country-based and region-based location decisions by MNEs in the concerned countries. For example, it is possible to investigate empirically whether Japanese multinational firms consider Thailand/Vietnam and the other three countries as two distinct groups of potential host countries, by examining the inclusive value parameters in nested-logit estimation. In particular, our sample countries all experienced dramatic changes in, for example, economic growth or trade costs reduction during the sample period. Thus, we will find the dramatic dynamics of such substitution patterns. Our rigorous analysis of the relative importance between country characteristics and region characteristics is invaluable from the viewpoint of policy implications. First, while the former characteristics should be improved mainly by central government in each country, there is sometimes room for the improvement of the latter characteristics by even local governments or smaller institutions such as private agencies. Consequently, it becomes important for these smaller institutions to know just how crucial the improvement of region characteristics is for attracting foreign companies. Second, as economies grow, country characteristics become similar among countries. For example, the LCD preferential tariff schemes are available only when a country is less developed. Therefore, it is important particularly for the least developed countries to know what kinds of regional characteristics become important following economic growth; in other words, after their country characteristics become similar to those of the more developed countries. I also incorporate one important characteristic of MNEs, namely, productivity. The well-known Helpman-Melitz-Yeaple model indicates that only firms with higher productivity can afford overseas entry (Helpman et al., 2004). Beyond this argument, there may be some differences in MNEs' productivity among our sample countries and regions. Such differences are important from the viewpoint of "spillover effects" from MNEs, which are one of the most important results for host countries in accepting their entry. The spillover effects are that the presence of inward foreign direct investment (FDI) aises domestic firms' productivity through various channels such as imitation. Such positive effects might be larger in areas with more productive MNEs. Therefore, it becomes important for host countries to know how much productive firms are likely to invest in them. The rest of this paper is organized as follows. Section 2 takes a brief look at the worldwide distribution of Japanese overseas affiliates. Section 3 provides an empirical model to examine their location choice, and lastly, we discuss future works to estimate our model.

Political economy of low sulfurization and air pollution control policy in Japan : SOx emission reduction by fuel conversion

In the early stages of the development of Japan’s environmental policy, sulfur oxide (SOx) emissions, which seriously damage health, was the most important air pollution problem. In the second half of the 1960s and the first half of the 1970s, the measures against SOx emissions progressed quickly, and these emissions were reduced drastically. The most important factor of the reduction was the conversion to a low-sulfur fuel for large-scale fuel users, such as the electric power industry. However, industries started conversion to low-sulfur fuel not due to environmental concerns, but simply to reduce costs. Furthermore, the interaction among the various interests of the electric power industry, oil refineries, the central government, local governments, and citizens over the energy and environmental policies led to the measures against SOx emissions by fuel conversion.

Response of local producers to agro-food port rejection : the case of Chinese vegetable exports

This paper analyzes the factors associated with the rejection of products at ports of importer countries and remedial actions taken by producers in China by taking as an example one of the most competitive agro-food products of China: frozen vegetables. This paper provides an overview of the vegetable production and distribution system in China and the way in which China has been participating in exports of these products. Later sections will examine in detail the frozen vegetable sector in China, identify the causes of port rejections, and the actions taken by the Chinese government and by producers, processors and exporters to improve the quality of frozen vegetable exports.

Transport Sector and Regional Price Differentials: A SCGE Model for Chinese Provinces

With regression formulas replaced by equilibrium conditions, a spatial CGE model can substantially reduce data requirements. Detailed regional analyses are thus possible in countries where only limited regional statistics are available. While regional price differentials play important roles in multi-regional settings, transport does not receive much attention in existing models. This paper formulates a spatial CGE model that explicitly considers the transport sector and FOB/CIF prices. After describing the model, performance of our model is evaluated by comparing the benchmark equilibrium for China with survey-based regional I-O and interregional I-O tables for 1987. The structure of Chinese economies is summarized using information obtained from the benchmark equilibrium computation. This includes regional and sectoral production distributions and price differentials. The equilibrium for 1997 facilitates discussion of changes in regional economic structures that China has experienced in the decade.

Industrial Policy in Asia

This paper examines three types of industrialization that have occurred in East Asia: the Japanese, Chinese and generic Asian models. Industrial policies in Japan and the Republic of Korea (ROK) initially protected local companies from foreign investors by imposing high tariffs on foreign investors. But Japan began introducing liberalization policies to attract foreign direct investment (FDI) in the 1960s, and the ROK began to welcome foreign technology in the 1970s. Meanwhile, the governments of the ASEAN countries and Taiwan established export-processing zones (EPZ) to invite FDI by offering preferential treatment, such as tax deductions and exemptions. China adopted similar industrial policies and also established EPZs, attracting the capital and know-how of multinationals and thereby strengthening the international competitiveness of local enterprises. This paper reaches the following three conclusions. First, it would have been difficult for East Asian countries to grow without FDI. Second, central governments were a crucial factor in these countries' growth strategies. Third, EPZs offering preferential treatment can effectively enhance aggregate growth in developing countries, and the Asian experience shows that this strategy can be applied to other countries that satisfy certain preconditions.