Russia and North East Asia - in Times of Globalization

1. General introduction Focus throughout this text will be on the development in the group of five North East Asian (NEA) countries, Russia, Japan, China, South Korea and North Korea1. The time frame covered will mostly be the years since the late 1990s and with a focus on the development in the years 2003 – 2004. A time period that will initially be used to exemplify a large number of geographic and economic processes that take place in countries generally. It is here shown and explained in a NEA setting. In the background, to all that is being covered, are processes related to the so-called economic “globalization”, along with the Achilles’ heels of this process, trade, energy, and transport. 1.1. A changing world economy As a result of the increasingly global setting of the world economy, with its increased interdependence in-between countries, it is becoming ever more difficult, if not impossible, to really control the economic development for politicians and multilateral organizations. This could, depending upon once personal point of departure, be looked upon as a positive, but also a negative effect. The increased mobility of money is just one such example. This has lead to that short-term speculation, in assets, but more dramatically, in the valuation of currencies, that leads to devastating effects on the economies of entire nations. This was demonstrated on a global scale with the breakout of the so-called “Asian Crises” in 1997. With capital owners having the upper hand in the process, it has become increasingly difficult, not only for companies but also for nations, to try to pursue a development agenda that is anything else than mainstream. On the domestic scene, it is still vote-seeking politicians that set the agenda, often with a preference of a status quo (best is no or only limited change), but the international reaction to the adopted policies is often best reflected by movements in currency values and changes in Foreign Direct Investment (FDI) flows. The quick pace of economic growth that has been seen during the current millennium among Asian economies and the quick recovery from the 1997 crises has surprised many. A crises that had its origin financially in Thailand, widened to Indonesia and then came to expose fundamental structural problems in all of the regions, economies. Increased international competition has since further strengthened demands for efficiency and productivity among countries and between companies. But the process has also increased demands on governments to show transparency in their operations and accountability for costs incurred. Russia and North East Asia - in times of globalization - 1 - Economic institutions, inside nations as well as outside, are spatially entangled in stable as well as shifting webs of socialized and institutionalized relationships. As such, these economic institutions cannot be looked upon as economic machines that respond to external market and cost conditions as perfect representatives and defenders of the market economic system. It is also important to remember that they should be looked upon as organizations made up of social relations among individual actors, where actions are both being facilitated and hindered by the structure of the institution and the resources available. The context in which a company, organization or country, is acting is important for the understanding as it is, also and always, an integral part of the subject or object under investigation. There is an invisible constant process at work that attempts to balance the influence between attempts to regionalize production systems and to globalize production. Each country and each region aim at retaining as much as possible the production chains, of manufactures as well as of the production of services. This is done against the will of, alternatively in co-operation with, first of all Trans National Companies (TNCs). A process that can include state subsidies as a carrot, and binding laws as sticks, to make TNCs follow what is locally or nationally, are seen as the most favorable way of action. Activities still have to be conducted inside the framework of what is ruled as being allowed by multilateral organizations, like the World Trade Organization (WTO) and the EU. Politicians and business leaders constantly face new challenges in these fields. EU enlargement in Europe and the global pressure on production costs from increasingly skilled labor in all parts of East Asia forces responsible governments in the west to rethink local employment policies. How will multinational groupings, individual nations, natural region at large and sub regions in particular, sustain competitiveness, growth and employment in an age of outsourcing?2 Employers, labor unions, researchers and politicians will be forced to reevaluate how to adjust general framework conditions for growth and prosperity, including the labor market (where applicable). In many countries, state employment regulations and labor market organizations need to adjust to new challenges from a multitude of aspects. Workers rights, referring to issues such as pay, protection, right to organize a s o, has with increased global competition become an ever more disputed issue. What are basic rights in a highly developed country is often far from the case in third world countries. To accept a workplace that includes clearly hazardous conditions, or is low paid with long working hours, could be the only work available for some low skilled worker in a less developed country. This neglect of environmental concerns and basic workers right gives an unfair competitive advantage to this substandard employer, compared to employers in developed countries that much follow strict regulations in these respects. Also the right of Russia and North East Asia - in times of globalization - 2 - organization, which is another basic workers right, is still not allowed in many countries. On the other hand the existence of multiple worker unions at the same work place, as is the case in many developed countries, can be as destructive as it often leads to “hold-up” problems and slows the decision-making. As internationalization gains momentum it not only becomes increasingly difficult to establish the ownership of assets, but also to establish responsibility. Or does it really matter who owns things? In a more globalised economy the distinction between “who is us” and “who are they” becomes increasingly blurred. If the state should give active support to improve domestic growth, or work place generation capacity, what and who should be favored? Should it be domestic outbound investments or international inbound investments, should domestic owners be favored ahead of foreign owners? Among the countries covered here, two typical such examples can be given that well show the blurredness that has emerged from the internationalization of capital flows. A lot of the capital that is moving around between Asian nations, and to an increasing extent concentrating on China, is controlled by Chinese nationals living in, or in the near surroundings of, China, frequently “lending” capital inside the extended family circle. Should this be considered to be foreign capital? In the case of Russia a similar pattern can be observed when in later years FDIs have started to flow into Russia from offshore tax heavens3. Overwhelmingly this is capital that has been “washed” and that is now returning in the form of FDIs. Should this be considered to be foreign capital? The purpose of eventual FDIs in the different cases cannot be overlooked, if it is aimed for establishing manufacturing export, or if the production is destined for consumption on the local market. However, any FDI will still be generating new workplaces and it will generate an inflow of foreign capital, at least in the short run. Most developing and expanding economies are very dependent on inward capital flow in the form of FDIs, which is needed to balance out a current- account deficit. Without such an inflow there would be a need to raise the national foreign debt, which would mean costly interest payments. It is uncertain how long such a process can continue and, as so often, it remains dependent upon a number of other economic parameters. From the point of view of stability of the macro-economic development, this dependence also forms a medium-term risk for foreign investors operating in an economy. The long-term determinant of the flow of FDIs is the incentive structure, allowing investors to make a profit, in the short or the long turn. Another much discussed factor is that of innovation capacity. It is not necessary investments that are made with the aim of finding the most innovative environment is not necessary, the reason could well be just low production costs, and if that is the Russia and North East Asia - in times of globalization - 3 - case then R & D will be conducted elsewhere inside, or perhaps outside, the company. As changes occur, e.g. in the investment and innovation climates, being the result of on-going processes, it is not very easy to quantify changes. The diversity of activities in the business society could also produce results that are positive for one kind of activity, but also be negative for another. On the other hand, for a less developed country practically any kind of FDI can be said to improve the local business and innovation climate, including the national currency balance. The intention here is not to explain the diversity of aspects around FDIs, but just briefly show its diversity. As the initial setting in different countries and regions can be expected to be very different, it is not really possible to write a brief general description of the effects of FDIs. In later parts containing the descriptions of the different countries, this subject will touched upon again, several times, when investments flows will be discussed.

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