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UNU-IAS Working Paper No. 108

Sustainable Industrialisation in Large Developing EconomiesChina and Indonesia Compared

Michael W Zhang and N S Cooray


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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

i d l t N l ti l f k f t i bl i d t i li ti


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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

h k i d h h d ili d d


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Figure 1

Figure 2

GDP growth in Japan and South Korea 1971-98

-5.0

0.0

5.0

10.0

15.0

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

Annual%


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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


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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

15 0

20.0


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Figure 4

Annual GDP growth in China and Indonesia 1971-79

-4

-2

0

2

4

6

8

10

12

1971 1972 1973 1974 1975 1976 1977 1978 1979

Year

%

IDN CHN

Sources: World Development Indicators 2000, World Bank


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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


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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 so-

called 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


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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.


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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


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Table 1 Total investment in China: State and foreign shares of the total (1981-1999)

Total investment

Year % of GDP

Government

sources % of Total

Foreign sources %

of Total

1981 19.8 28.1 3.81982 23.2 22.7 4.91983 24.1 23.8 4.71984 25.6 23.0 3.91985 28.4 16.0 3.61986 30.6 14.6 4.41987 31.7 13.1 4.81988 31.8 9.3 5.9

1989 26.1 8.3 6.61990 24.4 8.7 6.31991 25.9 6.8 5.71992 30.3 4.3 5.81993 37.7 3.7 7.31994 36.6 3.0 9.91995 34.7 3.0 11.21996 33.7 2.7 11.81997 33.5 2.8 10.6

1998 36 2 4 2 9 1


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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

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1981 1983 1985 1987 1989 1991 1993 1995 1997

Y

currentUS$

(millions


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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

0

5

10

15

20

25

30

35

40

45

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year

(%ofGDP)

IDN CHN



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Figure 10

Composition of GDP in Indonesia 1970-98

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year

%ofGDP

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

S W ld D l I di 2000 W ld B k


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Figure 12

Manufacturing value added in China and Indonesia 1980-98

0

5

10

15

20

25

30

35

40

45

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year

As%ofGDP

IDN CHN



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Figure 13

Urban population in China and Indonesia 1980-98

0

5

10

15

20

25

30

35

40

45

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year

As%oftotal

IDN CHN



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Figure 15

Illiteracy rate in China and Indonesia 1980-98

0

5

10

15

20

25

30

35

40

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year

%o

fpeopleaged15and

abov

IDN CHN

S ld l di ld k


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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 Sandbrook5, 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


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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


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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


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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.


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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.


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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


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Figure 16

Industrial CO2 emissions in China and Indonesia 1980-96

0

500

1000

1500

2000

2500

3000

3500

4000

1980 1982 1984 1986 1988 1990 1992 1994 1996

Year

mt

IDN CHN


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Figure 17

Industrial CO2 emissions in China and Indonesia 1980-96

0

1

2

3

4

5

6

7

8

9

10

1980 1982 1984 1986 1988 1990 1992 1994 1996

Year

Askgper1995US$o

fGD

IDN CHN



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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


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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


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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


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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 inChina: International Workshop on Chinas Agenda 21), Beijing: Ocean Press, inChinese

Amsden, A (1989)Asias Next Giant: South Korea and Late Industrialization, OxfordUP

Azis, I (2000) Development and Sustainable Future: The Environmental Dimensionof Indonesias Socio-Economic Progress, UNU/OECD International Conference onthe Sustainable Future of the Global System, Tokyo, 24-25 May 2000

Azis, I and D Roland-Host (2000) Recovery and Growth in Indonesia: Scenarios forSustainable 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 DevelopmentIssues, vol. 1, Oxford: Clarendon Press

Felker, G and K S Jomo (1999) New Approaches to Investment Policy in the ASEAN4, paper presented at the High-Level Dialogue on Development Paradigms, AsianDevelopment Bank Institute, 10 December 1999


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Patrick, H and H Rosovsky (eds) (1976) Asias New Giant: How the JapaneseEconomy 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 IndiasSustainable 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, andGovernments, Oxford UP


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Appendices

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

Year 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979GDPgrowth 6.1 1.9 -2.3 3.5 0.9 2.9 1.1 12.0 7.5 8.2 7 7.9 9.8 8.3 6.2 6 8.6 9.2 7.1

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

GDP growth 8.7 8.1 1.1 8.4 7.2 3.5 6 5.3 6.4 9.1 9 8.9 7.2 7.3 7.5 8.2 7.8 4.7-

13.2CurrentaccountbalanceUS$ bill -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 3.97Genuinedomesticsavings% of GDP 4 1.8 4 3.6 3.6 4 8.5 14.5 18.8 18.7 17.4 14.9 16.7 17.6 19 16.3 15 16.3 5.9Grossdomestic

savings %of GDP 38 31.7 29 28.7 29.3 28.6 26.3 29.7 31.6 32.8 33.2 31.8 32.1 31.8 32.3 30.6 30.1 31.5 24.1Illiteracyrate adulttotal % 30.7 29.6 28.4 27.3 26.3 25.2 24.1 23.1 22.1 21.2 20.3 19.4 18.6 17.8 17 16.3 15.6 14.9 14.3Urbanpopulation% of total 22.2 23 23.8 24.5 25.3 26.1 27 27.9 28.8 29.7 30.6 31.6 32.6 33.6 34.6 35.6 36.7 37.7 38.8Trade %of GDP 54.4 53.1 49.4 51.7 48.6 43.5 40.7 47.3 45.7 46.5 49.9 50.5 53.8 50.5 50.3 54 52.3 56 97.7MVA % ofGDP 13 12.1 11.9 12.7 14.6 16 16.8 17 19.7 19.7 20.7 21.4 22 22.3 23.3 24.1 25.6 26.8 24.9Inflation,

CPIannual % 18 12.2 9.5 11.8 10.5 4.7 5.8 9.3 8 6.4 7.8 9.4 7.5 9.7 8.5 9.4 8 6.7 57.6CO2 emiindustry 1.3 1.3 1.3 1.3 1.2 1.3 1.2 1.1 1.1 1 1.2 1.1 1.1 1.1 1.1 1.2 1.1 N/A N/A

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


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Appendices

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

Year 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979GDPgrowth -27.1 -6.1 10.3 15.8 16.4 8.3 -2.4 -2.7 10.1 14.1 5.7 2.7 8 2.7 6.9 -1.6 5.6 10.2 7.3

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

GDP growth 6 5.7 9.6 10.9 15.2 12.6 8.5 11.2 10.7 4.1 4 9.2 14.3 13.5 12.8 10.5 9.6 8.8 7.8CurrentaccountbalanceUS$ bill N/A N/A 5.67 4.24 2.03

-11.42 -7.03 0.3 -3.80 -4.32 12.00 13.27 6.40

-11.61 6.91 1.62 7.24 29.72 29.33

Genuinedomesticsavings% of GDP 4.9 -0.9 2 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 32Grossdomestic

savings %of GDP 34.8 32.9 34.8 34.6 34.5 33.5 34.7 36.1 35.7 35.3 37.9 38.1 37.7 41.8 43.1 43.1 41.5 42.7 42.6Illiteracyrate adulttotal % 34.5 33.1 31.7 30.4 29.2 28.1 26.9 25.8 24.8 23.9 23 22.2 21.4 20.6 19.9 19.2 18.5 17.8 17.2Urbanpopulation% of total 19.6 20.2 21.1 21.6 23 23 24.5 25.3 25.8 26.2 27.4 26.4 27.2 28 28.9 29.7 30.2 30.7 31.1Trade %of GDP 15.5 16.8 16.2 15.8 18.7 24.2 26.6 27.3 27.2 26.2 31.9 35.5 37.5 35.7 48.8 45.7 40.1 41.6 38.9MVA % ofGDP 40.6 38.7 37.5 36.8 35.7 35.4 35.5 34.4 35 34.5 33 33.4 34.7 36.6 36.9 37.5 37.8 38.2 37.1Inflation,

CPIannual % N/A N/A N/A N/A N/A N/A N/A 7.2 18.7 18.3 3.1 3.5 6.3 14.6 24.2 16.9 8.3 2.8 -0.8CO2 emiindustry 9 8.4 8.2 7.8 7.4 7.1 6.9 6.6 6.4 6.3 6.1 5.8 5.4 4.9 4.7 4.6 4.4 N/A N/A

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

i as working paper 108

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