UNU-IAS Working Paper No.

108 Sustainable Industrialisation in Large Developing Economies China and Indonesia Compared Michael W Zhang and N S Cooray

February 2004

Sustainable Industrialisation in Large Developing Economies China and Indonesia Compared Michael W Zhang and N S Cooray Abstract Industrialisation in East Asia during the second part of the twentieth century was a major academic research theme from various perspectives. Not only did industrial development help Japan become the world second largest economy, but it also lifted a number of Asian economies from poverty-ridden countries to newly industrialised economies In the early 1990s, however, a new concept of industrialisation, namely sustainable industrialisation, was in the making, which will shape the trajectories of economic development. New analytical frameworks of sustainable industrialisation have been constructed providing researchers with new perspectives to study the course of industrialisation. This paper attempts to apply a new framework in a comparative country studies between China and Indonesia. Comparison is also made where appropriate with Japan and South Korea so that paradigm shift from conventional industrialisation to sustainable industrialisation can be depicted. Some lessons are drawn from the research findings to shed light on policy implications and further research in the future.

Key words: sustainable development; industrialisation; growth; technological change; environmental protection

Introduction According to the World Bank definition China and Indonesia are two large low-income developing countries in the East Asia and Pacific group. Yet, East Asia has been at the centre of debates on economic development and industrialisation especially since the end of the Second World War. (World Bank 1993) First and foremost is Japan. Japan began its postwar reconstruction in the 1950s. A decade later Japan achieved remarkable results in economic development and joined the Organisation for Economic Cooperation and Development (OECD) in 1964. Japan enjoyed high economic growth and rapid industrial development until the late 1980s when the economy began to show bubbles and burst into recession by the end of the decade. By a comparative world standard even during the period of energy shortage resulted mainly from the two oil shocks in 1973 and 1979 the Japanese economy showed resilience and managed relatively well to land from a rapid to a moderate growth path. (See Error: Reference source not found and Error: Reference source not found) Many regard Japans rapid economic development as a miracle.1

One of the influential writings on Japans economic success is an edited book by Patrick and Rosovsky in 1976. Patrick, H and H Rosovsky (eds) (1976) Asias New Giant: How the Japanese Economy Works, Washington, DC: The Brookings Institution

Figure 1

Figure 2 GDP growth in Japan and South Korea 1971-98

15.0

10.0

Annual %

5.0

0.0 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 -5.0

-10.0

Year
JPN KOR

Sources: World Development Indicators 2000, World Bank

Following Japans success in industrial development a number of other East Asian economies, notably Hong Kong, Singapore, South Korea and Taiwan, also succeeded in realising their economic potential in the past decades.2 Take South Korea. From the 1960s to the 1980s South Korea underwent a spectacular process of industrialisation in which it raised itself from a poverty-ridden country to a Newly Industrialised Economy (NIE).3 (See Error: Reference source not found)

To a lesser extent, other Asian and Pacific economies such as Indonesia also initiated economic reform programmes in the same period. From the mid-1960s Indonesia embarked on economic reforms under a new administration. The New Order government was centralised and committed to promoting industrialisation. (Azis 2000; World Bank 2000) Economic growth was not as high an average figure in the 1960s as it was in the 1970s. (See Error: Reference source not found and Error: Reference source not found) Although China started its first industrialisation programme in the 1950s with the help from the Soviet Union and therefore followed a Soviet-style industrial development strategy under a system of central planning, interruption caused by deteriorating Sino-Russian relations and domestic political struggles resulted in cyclical growth and slow pace of technological change. Yet rapid development was achieved in heavy industries at the expenses of the underdevelopment of both agricultural and services sectors. Worse still, the development trajectory was broken by the advent of political struggle of Cultural Revolution in 1966, which lasted until 1976. Coming to power in 1978 Deng Xiaoping started his reform by rectifying Maos
2 3

The four East Asian economies under discussion are widely regarded as the Four Tigers. After the Korean War (1950-1953) South Korea was, like Japan was immediately after World War II, devastated. South Korea lacks natural resource endowment as Japan does.

development strategy and reformed property rights in rural China. At the same time opening up a number of Special Economic Zones (SEZs) along Chinas east coast to foreign investment was advocated. Therefore, China was well underway in transition from a centrally-planned to a market-based economy and intended to follow a kind of East Asian strategy of industrialisation. And in the 1980s and 1990s Chinas growth performance was on average much higher than that of Indonesias. (See Error: Reference source not found)

Figure 3

Annual GDP growth in China and Indonesia 1961-70

20.0 15.0 10.0 5.0 0.0 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

-5.0 -10.0 -15.0 -20.0 -25.0 -30.0

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

Figure 4 Annual GDP growth in China and Indonesia 1971-79

12 10 8 6 4 2 0 -2 -4 1971 1972 1973 1974 1975 1976 1977 1978 1979

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

Figure 5 Annual GDP growth in China and Indonesia 1980-98

20 15 10 5

%
0 1980 -5 -10 -15 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

From the mid-1990s, nonetheless, environmental issues became increasingly important to the analysis of economic development thanks to the 1992 World Conference on Environment and Development (WECD). During the last decade great amount of work has been carried out with regards to formulating the concepts and constructing the frameworks for sustainable development. Equipped with some theoretical framework and empirical findings, albeit still under test, in this paper we attempt to investigate the possibilities that may lead large developing economies such as China and Indonesia to embarking on more sustainable an industrial development path. Section Two reviews industrialisation in a conventional way using two East Asian economies, Japan and South Korea, as empirical studies. A hypothetical framework of conventional industrialisation is proposed to link it with another hypothetical framework for sustainable industrialisation in Section Three. Section Three then elaborates the factors and indices for analysing sustainable industrialisation. Each factor is examined against the empirical data and evidence from China and Indonesia. In conclusion research findings are provided and lessons drawn for policy formulation and implementation. Meanwhile potential further research is recommended.

Industrialisation There is not a specific definition of industrialisation. We consider the following description by Kuznets appropriate: [C]hanges in the industrial structure within which product was turned out and resources were employed away from agriculture toward nonagricultural activities, the process of industrialization. (Kuznets 1966: 1)

Framework 1 Hypothetical MCA model of East Asian Industrialisation, inspired by Munasinghes analysis on sustainable energy development. (Munasinghe 1996) Economic growth Social development Technological Change

One can therefore understand industrialisation by analysing changes in industrial structure within an economy. Using case studies of Japan and South Korea a

framework of industrialisation can be devised in the context of economic development and technological change. (Zhang 2000; see also Framework 1 above) In the literature of development economics key analytical dimensions can be, at the risks of oversimplification, summarised into three indices, namely, economic, social and technological. As well documented both Japan and South Korea achieved marked success in the developments of these three dimensions. South Korea followed the socalled export-oriented industrialisation (EOI) strategy. Social development and technological change came along with the continued improvement in export performance and market expansion. During the rapid growth period from 1962 to 1981 the annual average export growth rate was 38.2 percent. (Zhang 2000: 37)

In a similar vein, the experiences of industrial development in China and Indonesia can also be analysed within this framework. But before going further let us review the courses of economic reforms in China and Indonesia. As mentioned in last section, the Chinese government initiated a series of reform packages starting from the rural areas. Reforms of ownership and property rights resulted in a marked improvement of resource allocation. The agricultural sector was assigned more autonomy from the central government. Accordingly, local industries proliferated. The explosive growth of Township and Village Enterprises (TVEs) was attributable to the expansion of the regional rural and urban economy that subsequently had significant impact on the nonstate sector. In 1978 non-state enterprises only accounted for only 22.4 percent of total gross industrial output. After 15 years of reform, the share of the non-state sector grew to 53 percent in 1993. That indicator, however, increased to 71.5 percent in 1996. (China Statistical Year Book 1997)

Following the success of rural economic reform another important issue on top of Chinas reform agenda is the reform of public enterprises. Nonetheless, it is argued that public enterprises are not considered to be the obstacles to industrial development. Public enterprise in South Korea played an important role. As Mason points out, a role as large, in fact, as is common in developing countries following a socialist pattern. (Mason in Jones and Sakong 1980: xxix) Privatisation of public enterprise is then not considered to be the priority of the reform package. What matters is the effectiveness of government policy in, and the corporate governance of, these enterprises. Furthermore, learning of entrepreneurship in a competitive market environment is also critical, should these firms be prepared to survive and grow in the increasing competitive markets.

Furthermore, since China adopted the open door policy in late 1978, it has fundamentally changed its development strategy in the sense that China appeared to be more open than both Japan and South Korea in managing foreign capital investment. The South Korean government protected the domestic market to help foster indigenous enterprises in general and the large chaebol in particular. Foreign entries and investment were restricted through government screening. (Sakong 1993: 117) During the past two decades gross domestic savings were high in both China and Indonesia in terms of their shares in GDP. However, in the 1990s foreign direct investment (FDI) inflows to China were much higher than those to Indonesia and other economies in East Asia. China began the experiment of attracting FDI in 1980 in the SEZs in the south. Special areas in another group of fourteen cities along the east coast were

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opened up after the initial success of these SEZs. In order to further attract foreign investment the State Council approved in 1992 more than 300 cities for opening up to foreign investment. As a result, China attracted as well as utilised in the 1990s large amounts of foreign capital including FDI and foreign loans. (See Error: Reference source not found and Error: Reference source not found) Needless to say, a developing country as large as China needs a heavy amount of investment to induce growth. From 1981 to 1995 the average annual capital investment rate was 28.7 percent of GDP.4

Caution needs to be taken here that there is a need to differentiate between uncontrolled inflows of short-term funds and committed FDI. (Williamson 2000)

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Table 1 Total investment in China: State and foreign shares of the total (1981-1999) Total investment Government Year % of GDP sources % of Total Foreign sources % of Total

1981 19.8 28.1 3.8 1982 23.2 22.7 4.9 1983 24.1 23.8 4.7 1984 25.6 23.0 3.9 1985 28.4 16.0 3.6 1986 30.6 14.6 4.4 1987 31.7 13.1 4.8 1988 31.8 9.3 5.9 1989 26.1 8.3 6.6 1990 24.4 8.7 6.3 1991 25.9 6.8 5.7 1992 30.3 4.3 5.8 1993 37.7 3.7 7.3 1994 36.6 3.0 9.9 1995 34.7 3.0 11.2 1996 33.7 2.7 11.8 1997 33.5 2.8 10.6 1998 36.2 4.2 9.1 1999 36.4 6.2 6.7 Source: China Statistical Yearbook 1997 and 2000, State Statistical Bureau, Beijing

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Figure 6
Foreign direct investment in China and Indonesia 1981-98
45,000.0 40,000.0

curre nt US$ (millions)

35,000.0 30,000.0 25,000.0 20,000.0 15,000.0 10,000.0 5,000.0 0.0 -5,000.0 1981 1983 1985 1987 1989 1991 1993 1995 1997

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

Now let us look at Indonesian economic development in the 1970s and 1980s. The New Order government of Suharto initiated in 1967 a series of policy reforms aimed at rapid industrial development. Prior to the onset of Asian financial crisis average annual growth rate had been more than six percent. Unlike its East Asian counterparts of Japan and South Korea, however, Indonesia is rich in natural endowment. Indonesian forest areas are the second largest in the world after Brazil. From the late 1960s Indonesia became the largest exporter of industrial round wood in the world. (Alisjahbana and Yusuf 2000: 5) Proven oil reserves are estimated at five billion barrels and its position of oil production are among the top 15 oil-producing countries in the world. Therefore, when Japan suffered from the oil shocks in the 1970s

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Indonesian current account balance returned to surplus. (Azis 2000: 5 and see Error: Reference source not found) Figure 7
Current account balance in China and Indonesia 1981-98
35,000 30,000

curre nt US$ (millions)

25,000 20,000 15,000 10,000 5,000 0 -5,000 -10,000 -15,000 1981 1983 1985 1987 1989 1991 1993 1995 1997

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

The Indonesian economy grew at much higher rates than those of China in the 1970s as mentioned above. Although the 1970s witnessed the decrease in foreign investment inflows due to the policy change towards tightening investment licenses and protection of state-owned enterprises during the import-substitution years, domestic savings generated mainly from oil-related earnings supplemented the investment demand. (See Error: Reference source not found) In the late 1980s and the early 1990s the Indonesian economy was resilient due largely to the inflow of foreign investment and improved manufacturing performance by the non-oil sectors. (Felker and Jomo 1999;

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Azis 2000) Therefore, rapid economic growth and development helped improve significantly the standards of living and welfare of the people as a whole.

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Figure 8
Gross domestic savings in China and Indonesia 1980-98
50 45 40

(% of GDP)

35 30 25 20 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

Figure 9
GDP Composition in China 1970-98
60.0

50.0

40.0

% of GDP

30.0

20.0

1 0.0

0.0 1 970 1 972 1 974 1 976 1 978 1 980 1 982 1 984 1 986 1 988 1 990 1 992 1 994 1 996 1 998

Year
Agri, VA Ind, VA Serv, etc., VA

Sources: World Development Indicators 2000, World Bank

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Figure 10

Composition of GDP in Indonesia 1970-98

50.0 45.0 40.0 35.0

% of GDP

30.0 25.0 20.0 15.0 10.0 5.0 0.0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year
Agri, VA Ind, VA Serv, etc., VA

Sources: World Development Indicators 2000, World Bank

Figure 11
Manufactures exports in China 1984- and Indonesia 1981-98
As % of merchandise exports
100 90 80 70 60 50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

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Figure 12
Manufacturing value added in China and Indonesia 1980-98
45 40 35

As % of GDP

30 25 20 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

Figures 9 and 10 show the differences in changes in industrial structure in China and Indonesia. Industrial and manufacturing sectors dominated the process of Chinas industrial development. While extraction and exports of natural resources such as forests and oil form a large part of domestic production in Indonesia. (See Error: Reference source not found and Error: Reference source not found) In terms of social development both China and Indonesia achieved remarkable results in the process of urbanisation and reducing illiteracy. (See Error: Reference source not found, Error: Reference source not found and Error: Reference source not found)

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Figure 13
Urban population in China and Indonesia 1980-98
45 40 35

As % of total

30 25 20 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

Figure 14
Urban population in China and Indonesia 1960-79
25.0

20.0

% of total

15.0

10.0

5.0

0.0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

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Figure 15 Illiteracy rate in China and Indonesia 1980-98

% of pe ople age d 15 and abov e
40 35 30 25 20 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

The interaction between socio-political development and environmental protection can be clearly manifested by the repercussion of the East Asian financial crisis. China achieved unprecedented economic growth and development on a par with that of both Japan and South Korea as shown above. The Chinese economy was also less affected by the Asian financial crisis. In stark contrast, Indonesia was hit hard by the crisis. In the aftermath of the crisis Indonesia is faced with economic hardship, social calamities and environmental deterioration that compounded may jeopardise the quality of growth and development of the country. Therefore, sustainable industrialisation rather than industrialisation per se is in needs of in-depth study.

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Sustainable Industrialisation According to WCED sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. (WCED 1987: 43) Although as noted by Holmberg and Sandbrook 5, there exist more than 70 definitions of sustainable development, its essence has become increasingly clear: the integration of economic, environmental, and social policy. (OECD 1998: 2) In the 1990s academics and international institutions committed to sustainable development refined and constructed a number of frameworks. United Nations Industrial and Development Organization (UNIDO) articulates a framework entitled Sustainable Industrial Development (SID), which we find most appropriate for our research. The SID consists of three major components, namely, economic competitiveness, employment, and environment (3Es).6 Therefore we use terminology of sustainable industrialisation and sustainable industrial development interchangeably.

It becomes increasingly clear that both developed and developing economies need economic growth to sustain the level of employment and living standards. Albeit advanced in production technology and energy efficiency, developed economies are concerned with consumption behaviour and level of per capita emissions, while developing economies are striving to eliminate poverty and provide affordable energy access to the poor communities.

5 6

Cited from Kirkby et al (1995). While writing my PhD thesis, I was consulted by the UNIDO on a new project on Chinas sustainable industrial planning and policies in 2000.

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To unravel the complex features of sustainable development, we ought to ask and possibly have to answer the following two basic questions.

Question 1 Is economic growth needed to create employment opportunity and eliminate poverty? Yes. Although not sufficient but it is necessary to retain economic growth at certain level to generate employment opportunities and to eliminate poverty. Dasgupta and Maler argue that [p]overty itself can be a cause of environmental degradation. (Dasgupta and Maler 1997: 9) Let us look at the Chinese case. At the wake of its recent economic reform in 1978 China had 80 percent of its population living on incomes of less than 1 dollar per day--the World Bank minimum poverty line. The Chinese economy as a whole has grown at an average annual rate of slightly over 9 percent during the past twenty years. By 1995 the number of people living in poverty has been reduced to 80 million.7 (WB Country Brief 1998, 1)

Question 2 In the light of economic growth there is an increase in demand of production and consumption, which in turn has great impacts on the natural environment. Can economic growth be reconciled with environmental protection? If the answer is positive then how can the reconciliation be achieved? The answer to the first part of the question is yes. For the second part of the question it seems to be no definite answer yet. Or put another way, it cannot be generalised. For developed economies the priority is energy conservation and investment in R&D on

The current official poverty line is 530 yuan (US$64) a year, while the WB poverty line is US$1 per day.

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alternative energy resources such as biomass, hydro and photovoltaic power generation, since in the developed economies human resources and technological capabilities are readily available. Therefore what needed is to provide incentives as well as create market demand for environment-benign products. While in developing economies, attention has to be paid more on energy efficiency in the production front and affordable energy access within the poor communities in tune with the pro-poor sustainable development policy promoted by international development institutions. Even among developing economies there is difference between production composition and energy utilisation. Consequently the environmental impact of production process needs to be individually addressed.

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Framework 2 Hypothetical MCA model of Sustainable Industrialisation Economic growth Social development Technological change Environmental protection

In order to analyse the changes in policy making for industrial development in East Asia a new analytical framework is needed. Therefore, we adopted a framework developed by one of the authors of this paper to compare sustainable industrialisation in China and Indonesia. (See Framework 2 above) In comparison with Framework 1 it is unequivocal that the dimension of environment is added to the framework. Therefore, following our analysis above on the three indices including economic, social and technological we can easily move on to concentrate on the fourth important index: the environment. To do this we intend to focus on air quality in China. Environmental protection It is estimated that air quality in more than 500 major Chinese cities is below WHO standards. (UNDP China 1996) In 1995 vehicles on the roads in Beijing were a little less than one million, almost ten percent of the national total. As a result, emissions of nitrogen oxides (NOx) and monoxides (CO) reached 115,000 tonnes and 1.4 million tonnes, respectively. In stark contrast, Tokyo had in 1995 some four million vehicles in use, four times as many as the number in Beijing, but corresponding figures were 50,000 tonnes for NOx and 100,000 tonnes for CO. (Tsinghua 1997)

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The subject of industrial pollution and environmental protection is not new. In retrospect, following two air-pollution episodes occurred in Belgium in 1930 and in Pennsylvania in 1948, smoke and sulphur dioxide concentration in London was recorded in the mid-1950s on an order of ten times the current air quality standards. The British government promulgated the British Clean Air Act in 1956 immediately after the incident.8 In a similar vein, Japan also experienced severe industrial pollution in the 1950s and the 1960s. An episode of devastating water pollution known as Minamata disease was reported in 1953. The legacy of the incident left a lasting memory both within and without Japan.9 (Yamamura 2001) And it is widely recognised that environmental laws and regulations are among the most stringent in the world.

The Chinese government started to pay attention to the issues of industrial pollution and environmental protection in the early 1970s. Under the central planning regime, producers had no responsibility and incentives to protect the environment unless the government took the initiative. The government did not because they had little knowledge about the relationship between economic development and industrial pollution. After a decade of self-imposed isolation since breaking away from the Soviet Union in 1960 the Chinese government began to seek new trade partnership based primarily on diplomatic and economic rather than ideological grounds. Since the

Cited from Air Pollution in McGraw-Hill Encyclopaedia of Science and Technology, 8th ed. vol. 1, p.280. 9 In 1953 a kind of strange disease appeared first in cats and dogs that ate large quantity of discharged fish taken from Minamata Bay in the village of Minamata, Kumamoto prefecture near the west-coast of Southern Kyushu. Mr Yamamura gave a detailed account of this incident at an IAS seminar at the time of writing.

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restoration of diplomatic relations with the United States and Japan in 1972, China has become involved in more international economic affairs. The increasing concern by the industrialised economies of economic development and environmental protection culminated in the United Nations Conference on Human Environment held in Stockholm in 1972. China participated in the conference and learned of the concept of environmental protection. Thereafter the government began building institutional and legal systems. The first Basic Law on Environmental Protection was promulgated in 1979 and amended in 1989. This was followed by a series of environmental protection laws concerning various facets of the environment. In 1984 the National Environmental Protection Agency (NEPA), an independent government bureau after the United States Environmental Protection Agency (EPA), was established. A network of local environmental protection bureaux was also created.

Although the government promulgated numbers of environmental laws and regulations, until recently the NEPA had less power and authority than many other industrial line ministries in implementing policy. In addition, underdeveloped legal systems made these environmental laws and regulations have virtually no binding power. At local government levels, namely, provinces, prefectures, and counties, the picture is mixed. The county and prefecture governments are in charge of levying pollution taxes according to the Polluter Pays Principle, while the higher governments at the provincial level are responsible for re-distributing the collected taxes to local industries. This system of environmental protection has an inherent weakness. Local governments are in most cases the owners or joint-owners of local industries. In the case of TVEs, which are normally at levels lower than the county and

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engaged in light and processing industries that generate excessive industrial pollution, local governments may relax the regulatory regime in order to protect their local industry for economic reasons such as employment opportunities and local government revenues.

As analysed above, China has made great progress in dimensions such as economic and social development and technological change since the onset of open-door economic reform in late 1978. However, Chinas state of the environment has been significantly deteriorating which can be reflected in all sorts of pollution such as water and urban air pollution. This is not to say that industrial development under the previous regime had a better record. On the contrary, low efficiency and high waste rates resulting in environmental degradation were inherent in the central planning system. The reason underlying the recent experience of widespread industrial pollution is twofold. First, the legacy of inefficient production methods that looms large in the present system is reflected in most State-Owned Enterprises (SOEs) with high inputs and low outputs.

Second, closely related to the first, is the unprecedented rapid economic growth. The growth-induced industrial CO2 emissions increased steadily in China during the years of rapid growth in absolute terms. (See Error: Reference source not found)

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Figure 16
Industrial CO2 emissions in China and Indonesia 1980-96
4000 3500 3000 2500

mt

2000 1500 1000 500 0 1980 1982 1984 1986 1988 1990 1992 1994 1996

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

Rapid industrial growth within an inefficient system will no doubt increase the magnitude of industrial pollution. The serious air pollution caused by high concentration of exhaust emissions in Beijing is an example. Many of the vehicles on the roads were manufactured with outdated design and production technology running on low-grade fuels. As noted above, even with an efficient production system, industrial growth leads to industrial pollution, but to a lesser degree. Therefore, it can be argued that improving efficiency is in dire need in China. From the past experience we know that along with the progress of economic reforms economic efficiency in Chinese industry has been gradually improved. Increase in efficiency and decrease in pollution per unit of GDP can be measured by energy intensity in terms of input and emissions produced in terms of output.

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Figure 17
Industrial CO2 emissions in China and Indonesia 1980-96
As kg pe r 1995 US$ of GDP
10 9 8 7 6 5 4 3 2 1 0 1980 1982 1984 1986 1988 1990 1992 1994 1996

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

Figure 18

Energy intensity in China and Indonesia 1980-97

180 160 140 120

1990=100

100 80 60 40 20 0 1980 1982 1984 1986 1988 1990 1992 1994 1996

Year
IDN CHN

Sources: World Development Indicators 2000, World Bank

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From the point of view of building institutional capability, the enforcement of environmental laws and regulations is to be substantially enhanced in the light of the recent institutional reshuffle of the State Council. A handful of line ministries such as the Ministry of Machine-Building Industry have been transferred to become national Bureaux under the jurisdiction of the powerful super-ministry State Economic and Trade Commission. Another super-ministry, the former State Planning Commission that specialised in policy making at the macro level, has also been significantly strengthened. The expansion of its scope of policy making is reflected in the change of its name from the State Planning Commission to the State Development and Planning Commission.

The NEPA, although still outside the State Council but only a notch under ministry level, has been working closely with the State Development and Planning Commission and State Economic and Trade Commission in the process of formulating, and to a lesser extent implementing, Chinas Agenda 21. Helped further by such international institutions as the United Nations Development Programme (UNDP) and the World Bank, the NEPA has in recent years gained marked institutional capability and enforcement power. Therefore, there is clear evidence that the recent institutional innovation at the macro level has laid a solid foundation for the implementation of sustainable industrialisation strategy in Chinas long-term development horizon.

Conclusion This paper has attempted to study the courses of industrial development in China and Indonesia in the framework of sustainable industrialisation. By delineating the

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development paths of the two countries under consideration from four perspectives some lessons from each economy to the other can be drawn as follows.

At the outset it should be pointed out that sustainable industrialisation is a complex process that requires trade-offs between key factors. Win-win scenarios can only be found by collecting sufficient data and evidence from detailed empirical research.

Although Indonesia started economic reforms a decade earlier than China did in 1978, the policy regime was less consistent in addressing the quality of economic growth. Revenues generated by exploiting natural resources such as oil and forests were not prudently spent on investment in improving technological capability. With respect to the management of foreign investment it appears that Indonesian government was stuck in the ongoing debates whether industrial development can benefit from opening up to foreign investment or relying mainly on domestic resources. The boon of rich oil reserves in the light of world oil price hikes in the 1970s would have been an economic stimulus to the New Order reform programmes. Hit hard by the Asian financial crisis it seems imperative that economic growth be restored back to the pre-crisis level in order to ameliorate the dire consequences at both social and environmental fronts. At the environment front Indonesia is faced with daunting tasks in better management of natural resources. Our analysis above shows that Indonesia had high growth periods, but lacked an institutional framework capable of ensuring the quality of growth and the benefits of growth for the larger society. According to the World Bank the engine of economic growth for Indonesia was, and still is, resource-related exports from the

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natural forest. This kind of resource-dependency will remain over the next decade. (World Bank 2001: 1)

China is challenged by different tasks. Little deterred by the Asian financial crisis, economic growth has been comparatively higher than many of its neighbouring economies. In light of this remarkable growth performance China is able to carry out programme aimed at eliminating poverty. The result would have been sounder had the issue of inequality been kept in check. Regional disparity is also in rise resulted from the preferential financial incentives provided to the coast regions during the early years of reform. Manufacturing and technological capability has been markedly improved. However, rapid growth and low efficiency, albeit improved, caused the increase in absolute level of industrial pollution. Although environmental laws and regulations are well formulated, greater attention should be paid to enforcement and implementation.

Therefore, in both China and Indonesia building institutional capacity in economic and environmental management is a necessary first step to realise their potential in changing the courses of industrialisation from their conventional forms to sustainable paths.

Finally, sustainable development has called for country-specific approaches to policy making and implementation. The underlying rationale for this kind of thinking is the realisation of the complexity of sustainable development which includes such wide issues as economic growth, poverty elimination, regional development, natural resource management, social aspects of economic development. Moreover, within the

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sub-section of natural resource management it includes not only forest resources and mining, but also biodiversity. Therefore, the issue of sustainable development has to be analysed according to the characteristics of each region and country. Further research therefore is desirable in the direction of country-specific and industry-specific analysis.

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Acknowledgement This paper is partially based on the research done during Dr Zhangs PhD study on the comparison between China, Japan and South Korea in the context of late industrialisation and sustainable industrialisation. Further collaboration with Dr Cooray on sustainable development framework for Indonesia enables us to make a comparison between these two large developing economies in Asia. We would like to thank Professor Watanabe, Dr Kondo, Dr Contzen, Dr Palanivel and a number of other fellows at the IAS for their insightful comments and constructive criticisms.

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Bibliography ACCA21 (1994) Lun Zhongguo de Kechixu Fazhan (Sustainable Development in China: International Workshop on Chinas Agenda 21), Beijing: Ocean Press, in Chinese Amsden, A (1989) Asias Next Giant: South Korea and Late Industrialization, Oxford UP Azis, I (2000) Development and Sustainable Future: The Environmental Dimension of Indonesias Socio-Economic Progress, UNU/OECD International Conference on the Sustainable Future of the Global System, Tokyo, 24-25 May 2000 Azis, I and D Roland-Host (2000) Recovery and Growth in Indonesia: Scenarios for Sustainable Development, UNU/IAS Project Review Meeting on Indias Sustainable Development framework, Tokyo, 26-27 May, 2000 Dasgupta, P and Maler, K (eds.) (1997) The Environment and Emerging Development Issues, vol. 1, Oxford: Clarendon Press Felker, G and K S Jomo (1999) New Approaches to Investment Policy in the ASEAN 4, paper presented at the High-Level Dialogue on Development Paradigms, Asian Development Bank Institute, 10 December 1999 Home URL: http://www.oecd.org/subject/sustdev/oecdwork.html Jones, L and Il Sakong (1980) Government, Business, and Entrepreneurship in Economic Development: the Korean Case, Harvard UP Kirkby, J et al (1995) Sustainable Development: the Earthscan Reader, London: Earthscan Kuznets, S (1966) Modern Economic Growth: Rate, Structure, and Spread, New Haven and London: Yale UP Lau, L (1997) The Role of Government in Economic Development: Some Observations from the Experience of China, Hong Kong, and Taiwan in Aoki, M, HK Kim and M Okuno-Fujiwara (eds.) (1997) The Role of Government in East Asian Economic Development, Oxford UP Meadows, D et al (1972) The Limits to Growth, Universe Books Munasinghe, M (1996) Sustainable energy development (SED): issues and policy in Kleindorfer, P et al (eds) (1996), Energy, Environment and the Economy: Asian Perspectives, Edward Elgar, 3-42 OECD (1998) OECD Work on Sustainable Development: A discussion paper on work to be undertaken over the period 1998-2001

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Patrick, H and H Rosovsky (eds) (1976) Asias New Giant: How the Japanese Economy Works, Washington, DC: The Brookings Institution Resosudarmo, B (2000) Natural Resources Endowments and Utilization: Energy, Marine Resources and Biodiversity, UNU/IAS Project Review Meeting on Indias Sustainable Development framework, Tokyo, 26-27 May, 2000 Sakong, Il (1993) Korea in the World Economy, Washington, DC: Institute for International Economics Sakong, Il (ed.) (1987) Macroeconomic Policy and Industrial Development Issues, Seoul: Korea Development Institute WCED (1987) Our Common Future, Oxford UP Williamson, J (2000) Development of the Financial System in Post-Crisis Asia, ADB Institute Working Paper 8, ADB Institute, Tokyo, Japan World Bank (1993) The East Asian Miracle: Economic Growth and Public Policy, Oxford UP World Bank (2000) Greening Industry: New Roles for Communities, Markets, and Governments, Oxford UP World Bank (2000) Indonesia: Accelerating Recovery in Uncertain Times, World Bank Report No. 20991-IND World Bank (2001) Indonesia: Environment and Natural Resource Management in a Time of Transition, World Bank Zhang, M W (2000) Sustainable Industrialisation in China in the 1990s, unpublished PhD thesis, Sheffield University, UK

38

Appendices

Social and economic indicators in Indonesia 1961- and 1980-98

Year GDP growth Year GDP growth Current account balance US$ bill Genuine domestic savings % of GDP Gross domestic savings % of GDP Illiteracy rate adult total %

1961 6.1

1962 1.9

1963 -2.3

1964 3.5

1965 0.9

1966 2.9

1967 1.1

1968 12.0 1987 5.3

1969 7.5 1988 6.4

1970 8.2 1989 9.1

1971 7 1990 9

1972 7.9 1991 8.9

1973 9.8 1992 7.2

1974 8.3 1993 7.3

1975 6.2 1994 7.5

1976 6 1995 8.2

1977 8.6 1996 7.8

1978 9.2 1997 4.7

1979 7.1 1998 13.2

1980 8.7

1981 8.1

1982 1.1

1983 8.4

1984 7.2

1985 3.5

1986 6

-0.57

-5.32

-6.34

-1.86

-1.92

-3.91

-2.1

-1.4

-1.11

-2.99

-4.26

-2.78

-2.11

-2.79

-6.43

-7.66

-4.89

3.97

1.8

3.6

3.6

8.5

14.5

18.8

18.7

17.4

14.9

16.7

17.6

19

16.3

15

16.3

5.9

38 30.7 22.2 54.4 13 18 1.3

31.7 29.6 23 53.1 12.1 12.2 1.3

29 28.4 23.8 49.4 11.9 9.5 1.3

28.7 27.3 24.5 51.7 12.7 11.8 1.3

29.3 26.3 25.3 48.6 14.6 10.5 1.2

28.6 25.2 26.1 43.5 16 4.7 1.3

26.3 24.1 27 40.7 16.8 5.8 1.2

29.7 23.1 27.9 47.3 17 9.3 1.1

31.6 22.1 28.8 45.7 19.7 8 1.1

32.8 21.2 29.7 46.5 19.7 6.4

33.2 20.3 30.6 49.9 20.7 7.8

31.8 19.4 31.6 50.5 21.4 9.4

32.1 18.6 32.6 53.8 22 7.5

31.8 17.8 33.6 50.5 22.3 9.7 1.1

32.3 17 34.6 50.3 23.3 8.5 1.1

30.6 16.3 35.6 54 24.1 9.4 1.2

30.1 15.6 36.7 52.3 25.6 8 1.1

31.5 14.9 37.7 56 26.8 6.7 N/A

24.1 14.3 38.8 97.7 24.9 57.6 N/A

Urban population % of total Trade % of GDP MVA % of GDP Inflation, CPI annual % CO2 emi industry

1 1.2 1.1 1.1 Sources: compiled from the World Development Indicators 2000, World Bank; as kg per 1995 US$ of GDP

Appendices

Social and economic indicators in China 1961- and 1980-98

Year GDP growth
Year GDP growth Current account balance US$ bill Genuine domestic savings % of GDP Gross domestic savings % of GDP Illiteracy rate adult total %

1961 -27.1

1962 -6.1

1963 10.3

1964 15.8

1965 16.4

1966 8.3

1967 -2.4

1968 -2.7 1987 11.2

1969 10.1 1988 10.7

1970 14.1 1989 4.1

1971 5.7 1990 4

1972 2.7 1991 9.2

1973 8 1992 14.3

1974 2.7 1993 13.5

11.61

1975 6.9 1994 12.8

1976 -1.6 1995 10.5

1977 5.6 1996 9.6

1978 10.2 1997 8.8

1979 7.3 1998 7.8

1980 6

1981 5.7

1982 9.6

1983 10.9

1984 15.2

1985 12.6
11.42

1986 8.5

N/A

N/A

5.67

4.24

2.03

-7.03

0.3

-3.80

-4.32

12.00

13.27

6.40

6.91

1.62

7.24

29.72

29.33

4.9

-0.9

10.3

12.5

11.9

17.3

17.3

17.7

17.2

18.5

20.1

20.8

26.2

30.3

29.4

28

30.2

32

34.8 34.5 19.6 15.5 40.6 N/A 9

32.9 33.1 20.2 16.8 38.7 N/A 8.4

34.8 31.7 21.1 16.2 37.5 N/A 8.2

34.6 30.4 21.6 15.8 36.8 N/A 7.8

34.5 29.2 23 18.7 35.7 N/A 7.4

33.5 28.1 23 24.2 35.4 N/A 7.1

34.7 26.9 24.5 26.6 35.5 N/A 6.9

36.1 25.8 25.3 27.3 34.4 7.2 6.6

35.7 24.8 25.8 27.2 35 18.7 6.4

35.3 23.9 26.2 26.2 34.5 18.3

37.9 23 27.4 31.9 33 3.1

38.1 22.2 26.4 35.5 33.4 3.5

37.7 21.4 27.2 37.5 34.7 6.3

41.8 20.6 28 35.7 36.6 14.6 4.9

43.1 19.9 28.9 48.8 36.9 24.2 4.7

43.1 19.2 29.7 45.7 37.5 16.9 4.6

41.5 18.5 30.2 40.1 37.8 8.3 4.4

42.7 17.8 30.7 41.6 38.2 2.8 N/A

42.6 17.2 31.1 38.9 37.1 -0.8 N/A

Urban population % of total Trade % of GDP MVA % of GDP Inflation, CPI annual % CO2 emi industry

6.3 6.1 5.8 5.4 Sources: compiled from the World Development Indicators 2000, World Bank; as kg per 1995 US$ of GDP