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Pathways of local economic development: tales of cities in the United States and South Korea
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Content
PATHWAYS OF LOCAL ECONOMIC DEVELOPMENT:
TALES OF CITIES IN THE UNITED STATES AND SOUTH KOREA
by
Hyeyoung Chang
____________________________________________________________________
A Dissertation Presented to the
FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(POLITICAL SCIENCE)
December 2010
Copyright 2010 Hyeyoung Chang
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ACKNOWLEDGMENTS
Writing a dissertation can be a lonely and isolating experience, yet it is not
possible without the support of numerous people. This dissertation would not have been
possible without encouragement from Professors at the Chung-Ang University. In
particular, Professor Hoon Jaung believed in me and supported my study plan in the
United States from the beginning. Without his encouragement, my long journey in
academia would not have been impossible. Professor Woo Jin Lee always supported my
decisions and gave confidence to me.
I am heartily thankful to my dissertation advisor, Professor Jefferey M. Sellers,
whose encouragement, supervision and support from the preliminary to concluding levels
enabled me to develop an understanding of the subject. His guidance inspired the
possibility of a marriage between Comparative Politics and Urban Political Economy.
Members of my dissertation committee, Professor Richard Dekmejian and Professor
David C. Kang, have generously given their time and expertise to better my work. I thank
them for their contribution and their good-natured support. Many thanks must go to
Professor Michael M. Preston, who introduced urban politics to me, showing another
aspect of political science, and taught me the way to be a ―teacher.‖
Throughout my graduate program, the Department of Political Science provided
tremendous support, including a teaching assistantship and research assistantship. During
my graduate courses, I met numerous wonderful people, who shared their compassion
and valuable friendship. Jennifer Young Joo Chi showed true friendship in numerous
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times. I hope that she knows how much I have appreciated our constant intellectual
challenges and companionship throughout our whole graduate program. I wish her the
best on her academic and personal accomplishments. Yujen Kuo and Euisuok Han
shared their academic passion and helped me stay focused on my graduate study. Mr.
Eun Ha Chi and Mrs. Chae Sook Chi provided me with generous supports throughout the
difficult years. Also, particular thanks must go to my ―Alhambra‖ family, who helped me
stay sane through these complex years. I greatly value their friendship.
Most importantly, none of this would have been possible without the love and patience of
my family. My father, Gwang Jung Chang, my mother, Sung Hee Park, and my brother,
Ki Hyuk Chang, to whom this dissertation is dedicated, showed their unlimited love and
sacrifice for my accomplishments.
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TABLE OF CONTENTS
Acknowledgments ii
List of Tables vii
List of Figures ix
Abstract x
Chapter 1: Introduction 1
1.1. Puzzle 1
1.2. Cases 4
1.3. Why Cities Matter 6
Manufacturing Industry City 10
Cities in Two Countries 12
1.4. Hypotheses 18
First Hypothesis: International Market Situations and Locality 18
Second Hypothesis: Nation‘s Institutional Environment 22
Third Hypothesis: Asset Specificity in Localities 25
1.5. Tentative Answers 27
1.6. Structure of the Dissertation 29
Chapter 2: Case Overview: Four Cases, Two Settings: Detroit and Pittsburgh 31
vs. Ulsan and Pohang City
2.1. Introduction 31
2.2. U.S. Cases: Detroit City and Pittsburgh City 34
City of Detroit 34
City of Pittsburgh: Transition Without Federal? 39
Differences and Similarities Between Detroit City and 46
Pittsburgh City
2.3. Korean Cases: Ulsan Metropolitan City and Pohang City 49
Ulsan Metropolitan City 54
Pohang City 61
Comparison Between Ulsan and Pohang 66
2.4. Conclusion 68
Chapter 3: The Impact of the International Market on Localities 70
3.1. Introduction 70
3.2. U.S. Cases: Different International Market Conditions and 73
Timing Between Auto Industry and Steel Industry
Detroit: Declining Automobile Industry in the International 73
Market
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Pittsburgh: Complete Collapse in Steel Industry in the 76
International Market
3.3. Korean Cases: Late-Comer‘s Advantage in the International Market 79
Ulsan 80
Pohang 81
3.4. Conclusion 89
Chapter 4: Institutional Environment in Two Countries 93
4.1. Introduction 93
4.2. Difference of Institutional Environment: Federal System vs. 95
Unitary System
Market-Centered vs. State-Centered Cities 98
U.S. Cities in a Federalist System 102
Federal and State Governments in the U.S. 103
Detroit: Constant Federal Aid Beneficiary 110
Pittsburgh: Transition without Federal? 112
4.3. Korean Cities in a Unitary System 116
Ulsan Metropolitan City: Constant Beneficiary 121
Pohang: Consistent National Government Support 124
Ulsan and Pohang: Constant Beneficiaries 127
4.4. Conclusion 130
Chapter 5: Asset Specificities as Determinants of Local Economic 133
Development
5.1. Introduction 133
5.2. Transaction Cost Approach 135
5.3. Different Localities, Different Realities: Asset Specificity 138
Human Asset Specificity 139
U.S. Cases: Detroit and Pittsburgh 141
Korean Cases: Ulsan and Pohang: Continuation of Human Assets 146
Physical Asset Specificity 150
U.S. Cases: Detroit and Pittsburgh 152
Korean Cases: Physical Asset Fixation 155
Sectoral Asset Specificity 158
U.S. Cases: Detroit and Pittsburgh: Continuation of a Single 163
Industrial Structure vs. Diversification in Local Industrial
Structure
Korean Cases: Pohang and Ulsan: Specialized Single Industry 169
vs. Diversification of Manufacturing Industry
5.4. Conclusion 173
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Chapter 6: Conclusions 182
6.1. Overall Summary 182
6.2. Uncertainty and Local Economy 193
6.3. Pathways of Local Economic Development as Reducing Uncertainty 199
Detroit and Pittsburgh 201
Ulsan and Pohang 204
6.4. Implications 206
Bibliography 210
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LIST OF TABLES
Table 2.1 General Characteristics of Four Cities 33
Table 2.2 Total Population and Population Change Since 1970: Detroit City 35
Table 2.3 Change of Racial-Ethnicity in Detroit 36
Table 2.4 Poverty Level in Detroit 38
Table 2.5 Total Population in Pittsburgh Area 41
Table 2.6 Change of Racial-Ethnicity in Pittsburgh Area 42
Table 2.7 Poverty Level in Pittsburgh Area 45
Table 2.8 Detroit and Pittsburgh General Characteristics Overview 49
Table 2.9 Population Change in Ulsan Metropolitan City 56
Table 2.10 Change of Unemployment Rate and Economic Participation 57
Labor Force
Table 2.11 Production of Main Industry: Ulsan Metropolitan City 58
(dollars), 2007
Table 2.12 Ulsan Metropolitan City Policies (2002-2007) 60
Table 2.13 Population Change in Pohang City 62
Table 2.14 City of Pohang: Number of Establishments and Workers by Industry 65
Table 2.15 Comparison Between Ulsan and Pohang 68
Table 3.1 Percentage of Steel Production in Selected Countries, 1980-1990 83
Table 4.1 Unemployment Rates for Selected Cities (50,000 or more population) 111
Table 4.2 Selected Federal Programs Providing Support for the U.S. 114
Steel Industry
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Table 4.3 Pubic Revenue and Intergovernmental Aid for the City of Detroit and 116
Pittsburgh (per capita)
Table 4.4 Overview of Korean City Policies Since the 1960s 120
Table 4.5 Changes of Economic Structure in Ulsan (1962-1997) 122
Table 4.6 Pohang Industrial Characteristics 126
Table 4.7 Percent Change of Economic Development Sectors in General 130
Expenditure
Table 5.1 Percentage of Persons Aged 25 or More by Highest Educational 142
Attainment: Detroit City and Pittsburgh City
Table 5.2 Median Years of Tenure with Current Employer for Employed Wage 145
and Salary Workers by Industry, Selected Years
Table 5.3 Employee Tenure by Selected Firms in Ulsan Metropolitan City and 148
Pohang
Table 5.4 Detroit Industrial Sectors, 1997, 2002, 2007 165
Table 5.5 Pittsburgh Industrial Sectors, 1997, 2002, 2007 167
Table 5.6 Pohang Manufacturing Industry by Establishment and Employees 172
Table 5.7 Degree of Asset Specificity 174
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LIST OF FIGURES
Figure 2.1 Change of Labor Force, Detroit Area 37
Figure. 2.2 Change of Labor Force, Pittsburgh City 44
Figure 2.3 Population and GDP Concentration in Korea 51
Figure 2.4 Percentage of Pohang Manufacturing Industry in North 64
GyeongSang Province
Figure 3.1 World Motor Vehicle Production by Regions and Selected 73
Countries (%)
Figure 3.2 Steel Production in the US and South Korea Companies, 1970-2007 85
Figure 3.3 Percent of Motor Vehicle Production in the World: U.S. and 87
South Korea
Figure 3.4 Production of Shipbuilding Industry of Selected Countries, 1990-2009 88
Figure 4.1 Federal Grants-in-Aid to State and Local Governments: 1990- 106
2007 (%)
Figure 4.2. State Government Revenue Per Capita, 1980-2003 107
Figure 4.3 Subsidies Per Capita in Pohang and Ulsan, 1994-2005 128
Figure 4.4 Local Transfer Per Capita, Pohang and Ulsan, 1994-2005 129
Figure 5.1 Asset Specificity in Each City‘s Sectoral Assets 181
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ABSTRACT
Local economic development may be defined as increases in the ―local
economy‘s capacity to create wealth for local residents.‖ With current unlimited
competitiveness in the international market, cities have become not only a place to
produce goods but also a spatial consideration for current and future workers‘ everyday
lives. However, not every city can achieve its desired economic success, and the
pathways toward economic prosperities are diverse. How to accomplish the desired level
of economic development and what to develop are two different but intertwined issues
that should be understood based on political, economic, and social conditions in localities.
Variations in local economic development have been explained by the international,
national, and local contexts. These political and economic contexts are shaped by the
nation state‘s political structure, the structure of industry in localities, and determining
local governance structure. What are the determinants of the type of local economic
development in the manufacturing industry cities in different political settings?
This research focuses on the impacts of political and economic contexts of cities
and their local economic development pathways, conducting in-depth case studies of
industrial cities in the United States and South Korea: the City of Detroit, the City of
Pittsburgh, Ulsan Metropolitan City, and the City of Pohang. The research is validated by
the process-tracing method with document research and archive research, including
various years of government reports, organization‘s special reports, annual White papers,
census data, and each city‘s statistical data.
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Determinants of local economic development in two different political settings
can be understood with international market force, characteristics of political institutional
structure, and the role of asset specificity in the region. International market change
provides a more direct impact on a single dominant industry-oriented city such as Detroit
than on cities of fragmented industry structure like Pittsburgh. Korean cases show a
mixed picture of interplay among international market forces, national government, and
industry structure, which differs from the United States. While the decentralization
process in Korea provides positive opportunities to enhance the local capacity to Ulsan
Metropolitan City for overcoming the international marketforce, the same process can be
a constraint in the city of Pohang due to its single dominant industry structure. The nature
of national political institutions influences the variation in local economic development
patterns. In general, the federal system (as compared to a unitary system) tends to create
more competition among local governments for government resources. With the insight
of transaction cost approach, characteristics of asset specificity in a region explain the
diverse impact of each asset specificity in the region. Level of asset specificity plays a
negative role in the local government‘s flexible decision making on local economic
development. Traditionally, in top-down development approaches and bottom-up
development approaches— but even bottom-up development approaches— it is hard to
ignore the role of the higher level of governments. Some localities more rely on the
higher level of government support in order to reorganize and enhance the local
economy. Asset specificity is not fixed and constantly transforms based on the mobility
of capital and labor. If asset specificity is high in a region, firms do not want to move
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from the region unless they are willing to accrue substantial cost, and thus asset
specificity becomes a strong bargaining tool when the relationship with local government
needs to be negotiated. In the case of the developmental state, asset specificity in certain
a locality is heavily embedded over time due to the national economic development plan.
For example, Ulsan and Pohang had been designated as ―targeted‖ growth poles for
national economic development over three decades with specific manufacturing
industries such as automobile, petrochemical, shipbuilding, and steel industry.
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CHAPTER 1: INTRODUCTION
1.1. Puzzle
Cities seek prosperity through steady economic development. Due to the rapid
growth of urban populations during the past few decades, cities have become important
political and economic entities (DiGaetano & Klemenski, 1999; Logan & Molotch, 1988).
The function of cities has changed from being simple service deliverers to more active
political actors in the national realm and in the international marketplace. Particularly due
to the current climate of unlimited competitiveness in the international market, cities have
become not only places to produce goods but also sites of spatial consideration for
current and future workers‘ everyday lives (Sassen, 2000; Savitch & Kantor, 2002).
Cities illustrate their diverse political and economic positions through their spatial and
historical legacies. In the globalization era, cities have tended to follow a ―successful
model‖ of local economic development and, as a result, economic prosperity is what
every city would like to achieve. However, not every city can achieve its desired
economic success and the pathways toward economic prosperity are diverse. How to
accomplish the desired level of economic development and what to develop are two
intertwined but different issues, the understanding of which that should be based on
political, economic, and social conditions in localities.
Not every city demonstrates the same vitality and prosperity in economic
development over time. Older industrial cities in America clearly indicate the complex
and important role of the city in bolstering local and national economies. Detroit and
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Pittsburgh, once dominated by single main industries, are now seen from very different
perspectives regarding local economies. Detroit‘s current economic condition is less
prosperous than that of Pittsburgh. That every city functions in different political settings
raises the question of how to allocate restricted resources in cities that have been the
subject of American urban politics (Peterson, 1981). Because their resources are limited,
local governments need to maximize them to achieve their goals, and that includes
promoting local economic development. With limited resources, local governments must
decide on their priorities for economic development. In the field of American urban
politics, research illustrates what determines the rise and fall of an urban economy,
pointing to the growing importance of the international market force both directly and
indirectly on local economies. However, understanding how and which local economic
development a city has been chosen— as well as ―why‖ a city chooses a specific pattern
of local economic development– remains difficult. Moreover, previous research seldom
explains how national and local political contexts function in local economic
development, and where these interactions have lead.
This research focuses on the impact of political and economic contexts on cities
and on their local economic development pathways, using as case studies manufacturing
industry cities in two countries. Cities often undertake complete transformations; some
seek urban rejuvenation of their inner city, particularly downtown redevelopment, as
local economic boosters. Regional maintenance of existing businesses and industries
means local economic development in specific cities. This variation in local economic
development has been explained in international, national, and local contexts. Its
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political and economic contexts are shaped by the nation state‘s political structure, the
structure of industry in localities, and determining local governance structure. Why do
different cities show various pathways of local economic development? What are the
determinants of local economic development in manufacturing industry cities with
different political settings?
Many relevant theories address local development. Not only territorial
development but also social and cultural development in localities and regions have
attracted the interest of researchers. In this study, local development has been narrowed
to local economic development — in particular, the extent to which localities and regions
create relative economic success based on existing industries. Following Storper and
Walker (1989), local economic development is here understood as the context for
transformation of mass production and for the various ways of overcoming increased
market and political uncertainty in an era of globalization. In Storper and Walker‘s
approach, cities and regions are interpreted as active and causal elements rather than
passive backgrounds to the economic growth process (Scott & Storper, 2003). Local
development focuses on how localities and regions develop regional economic growth
and prosperity. The direction of local economic development varies, depending on the
institutional aspects of localities as well as on the national context. In the era of
globalization, nation states and subnational state entities have sought to cope with
growing uncertainty and complexity by going in diverse directions with local economic
development.
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1.2.Cases
The research focuses on ―manufacturing industry-oriented cities‖ in two different
political settings with three hypotheses in order to answer the research questions. To
understand what influences local economic development, this research concentrates on
the determinants of local economic development pathways, using in-depth case studies of
the following industrial cities in the United States and South Korea: the City of Detroit,
the City of Pittsburgh, Ulsan Metropolitan City, and the City of Pohang. The research is
validated by the process tracing method with document research and archival research,
including several years of government reports, companies‘ occasional reports,
organization‘s special reports, annual White Papers, census data, and each city‘s
statistical data.
Two sets of cities share several similarities including population size,
concentration of industry, and economic status in the region. For examples, Detroit and
Ulsan Metropolitan city both have populations of approximately one million and the
populations of Pittsburgh and Pohang are similar at close to 300,000. Although each case
has unique a situation, they all share one similarity: a history of heavy dependence upon
the dominant industry by their local economies. For Detroit and Ulsan, automobile
making has been one of the main industries, serving as the backbone of local and national
economies. Pittsburgh and Pohang have been the locales for major steel industry.
Despite the similarity of these industries, however, these cases show different local
economic development over time. International economic situations affect the local
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economy directly and indirectly, but the degree and nature of the impact may also be
different for the automobile industry and the steel industry. Nevertheless, the recent
international economic situation has shaped local economic development through
different industry conditions. Different industrial structures influence the pattern of local
economic development. The characteristics of a city‘s industry influence local economic
development such as longevity of the industry and the relationship of that industry to the
community. Another possible determinant of local economic development is the national
political structure— for example, a Federal system or a Unitary system. National state
structures shape the infrastructure of local government, and lead to specific decisions
around local economic development (DiGaetano & Lawless, 1999; Sellers, 2002).
Placing constraints but also providing opportunities, national political and economic
institutions shape local choices, which in turn generate different development paths. This
argument is even more relevant to cities with manufacturing industries or in developing
countries. Different national state structures construct different local capacities not only
in the growth of service centers but also in the manufacturing industry because national
state structures such as federal and unitary systems are heavily embedded in a locality.
However, the international market situation, with different industrial structures
and national state structures, do not give a full answer as to why cities with similar
economic structures show different types of local economic development. Certainly
important is that cooperative and conflicting local interests can shape local economic
development pathways. If involved players, such as national and local governments and
businesses, share similar or cooperative local interests, local economic development
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pathways show the outcome of compromises around local interests. Variations in local
interests influence the formation or existence of local governance structures. Although
international market forces and different national structures influence the local economy
directly and indirectly, local governance may also play an active role in determining local
economic developments regardless of different nation state structures and types of
industry.
1.3.Why Cities Matter
Discourses of the city have proliferated over the past decades, especially with the
emergence of world city and global city literature. Global city discourse brings new
attention to the importance of the city in domestic and international markets. Cities wield
control over vast resources, while finance and specialized service industries can
restructure the urban social and economic order. City and urban development have caught
the attention of students of social science and policy agenda who are exploring the role of
major cities with service-related industries under the changing global economy (Amin &
Graham, 1997; Crouch, Le Gales, Trigilia, & Voelzkow, 2001, 2004). These scholars
have explained how some major cities heavily involved in the service industry relate to
each other through international financial flows. As they aim to position themselves
better economically, cities must overcome global economic changes and accommodate
domestic changes.
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Cities ultimately boost quality of life and economic growth at home (Brookings
Institute, 2005). As such, world city and global city literature shows how globalization
affects life on a local level, addressing the world city network and the international urban
hierarchy among service cities in the world. These studies examine the proximity of
subnational units internationally and the increasing mutual impact of interconnected
regions among states (Sassen, 2000; Savitch & Kantor, 2002). They posit that global
cities act as command centers in the organization of the world economy; as key locations
and marketplaces for leading industries of the current period, which are finance and
specialized services for firms; and as major sites of production for these industries,
including the production of innovation (Sassen, 1994, 2000). As Michael P. Smith argues
(2001), the global cities thesis depends upon the assumption that global economic
restructuring precedes and determines urban spatial and sociocultural restructuring,
inevitably transforming localities by disconnecting them from nation-states, national legal
systems, local political cultures, and everyday place-making practices. Global city
discourse has rekindled academic interest in the city as an economic location as well as a
citizen‘s residential area.
Global city and world city arguments often neglect how the specificity of local
politics, also embedded within and among national contexts, can influence the diversity
of local capacity, thus determining local economic development patterns that are
governed by overlapping ―political units‖ (Hill & Kim, 2000; Keil, 1998, p. 632).
Furthermore, the literature for studying urban transformations in a developing world is
not as effective as it could be (Robinson. 2002).
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As a result, the study of urban transformation and the urban economy in developing
countries or transitional states has been either neglected or over-generalized.
Comparatively, at the national scale, developing countries such as China and South Korea
are concentrating on particular city-regions to promote national economic development
over the next few decades.
In addition to the discussion of global cities is the important role of old industrial
cities such as Detroit and Pittsburgh, which are associated with the effort to accommodate
rapid economic restructuring. Neither city is categorized as a world/global city due to its
lack of commanding power with the kind of highly specialized finance and service firms
that have replaced manufacturing as the leading economic sectors. Growing awareness
of the importance of city activities on a national, regional, and global scale has appeared
in much of the research (Asian Development Bank, 1996; World Bank, 1991, 1999,
2000). Certain cities— especially world/global cities— are directly linked to international
markets and, as a result, there is consensus that such cities need to provide sound public
services and a business-friendly environment in order to retain their traditional firms, and
to attract new investment, domestic and foreign (Sassen & Scott, 2001). Whereas these
cities create a significant portion of the production in the basic manufacturing industry,
they fail to be the main focus in the field of study because they are sites of ―old‖ and
―faded‖ industry.
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Even though their local economic structures are showing a marked shift from the
manufacturing industry to the service industry, in reality, leading manufacturing
industries still play a significant role in people‘s everyday lives. People in Detroit are
more interested in the fate of the so-called ―Big Three‖ than in the dynamics of White
House. Pittsburghers‘ attention is focused more on hiring advertisements at the
University of Pittsburgh‘s Medical Center than on California‘s unexpected wild fires.
The competitiveness of localities also serves as a reason why the current discourse
of the city is proliferating in the social sciences. Proponents of urban political economy
research ascribe the different pathways of local economic development to the limited
capacity cities have had in overcoming the rapid economic restructuring of the past few
decades (Sassen & Scott, 2001). With regard to the competitiveness of globalization, as
suggested by Brenner (1998), the reconstituted role of the nation state in today‘s global
economy does not necessarily diminish its role in governing national space; nation-states
still bear a significant influence on local economic development.
Other significant research reveals the dynamics of power relationships around
governance within localities (Brenner et al., 2003; O‘Neill, 1997; Peck & Yeung, 2003;
Weiss, 1997; Yeung, 1998). However, despite these insights into urban policy, few
studies have explained the sources and governance in these localities in terms of
decisions regarding the kind of economic pathways that facilitate relationships among
important players such as the nation state and business in a transitional economy. One
key agent in the local economic development pathway is the territorial state. The state in
its various institutional and spatial forms continues to exert critical influence over the
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processes and governance of local economic development. The relationship between the
territorial state and local economic development has emerged out of global city discourse
and state restructuring debates. As Brenner (1998) argues, ―Global city formation cannot
be adequately understood without an examination of the matrices of state territorial
organization within and through within it occurs‖ (p. 27).
Manufacturing Industry City
While these cities create a significant portion of the production in the basic
manufacturing industry, their status prevents them from being the main focus of study
mainly because their main industry is not information or knowledge-based (service
industry). Even though economic indicators show a clear decline in the manufacturing
industry— not only in the United States but also in transitional countries such as South
Korea— still, the manufacturing industry plays an important role in sustaining and
boosting local economies as well as the national economy. According to a report from
the U.S. Department of Commerce in 2004, manufacturing sectors continue to account
for 14% of the U.S. GDP and 11 % of total U.S. employment (U.S. Department of
Commerce, 2004).
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Even though the industrial structure has recently shifted from manufacturing to service
and information, the manufacturing industry remains relatively significant. For example,
the manufacturing sector‘s contribution has remained roughly steady at 0.6 % points for
each 10 years average annually from the 1977-1987 period to the most recent 1992-2002
period.
1
Even though the service industry occupies the main share of the total GDP, the
manufacturing industry still plays a significant role in promoting certain local economic
development due to the dependence of local economies on the manufacturing industry.
Additionally, certain service industries are closely related to specific manufacturing
industries. For example, the container docking industry at a port cannot survive without
the shipbuilding industry and container maintenance. Auto insurance firms and dealer
shops cannot exist without the automobile industry. Therefore, a service industry-
dominant society still needs to appreciate the importance of the manufacturing industry—
which is why manufacturing industry-dominant Rustbelt cities like Detroit and Pittsburgh
need to receive equal consideration.
Another reason why manufacturing industry cities need to be considered in the
research is so that we may gain an understanding of the diverse patterns of local
economic development. The manufacturing industry tends to be sensitive to external
1
For more information, see Figure 5. Manufacturing as a Percentage of Average U.S.
Private GDP Growth, 1987-2002 (Ten-Year Averages) from U.S. Department of
Commerce, (2004, January), Manufacturing in America: A comprehensive strategy to
address the challenges to U.S. manufacturers. Washington, D.C.: Department of
Commerce.
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forces, such as fluctuations in the international economy. For example, because of
differences in place dependence, relocating an automobile assembly factory outside city
borders is easier than moving the headquarters of a financial company. Relatively
speaking, the manufacturing industry hires many local workers. Therefore, when the
manufacturing industry is affected by international market forces, the local economy also
tends to be significantly affected. Fluctuations in the local manufacturing industry
directly affect the local community, and the manufacturing industry tends to be located in
one place for a relatively longer time than the service industry. Therefore, the
manufacturing industry tends to establish diverse relationships with local elites and local
communities. Though economic indicators show a clear decline in the manufacturing
industry— not only in the United States and but also in transitional countries such as
South Korea— the manufacturing industry still plays an important role in boosting and
maintaining local and national economies.
Cities in Two Countries
Currently cities are demonstrating similar patterns, seeking economic
development, trying to improve quality of life, and increasing accountability. This
phenomenon can be seen no matter where cities are located. Regardless of different
national contexts, cities share a number of key elements, such as population growth,
unemployment rates, fluctuations in economic growth, and environmental challenges.
However, how cities respond to these external and internal pressures vary according to
their political, economic, and social conditions. Recent research shows a convergence of
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characteristics between cities in the North and South, which suggests the possibility of
conducting a comparative analysis of cities with different political systems. Michael
Cohen has argued that a common set of critical economic, social, infrastructural,
environmental, and institutional problems beset urban areas regardless of level of national
development because local responses to local problems are based on local realities
(Cohen, 1996, pp. 25-26).
In addition, in advanced Western democracies, urban public policy is being
increasingly determined by global socioeconomic factors, over which national
governments— let alone regional or local ones— have little control. Sancton (1993) has
proposed that the close relationship between the global economy and urban concentration
heavily involves urban center restructuring and the continued decentralization of
development in the inner city. He suggests that the more closely associated cities or
regions are to the global economy, the more open and competitive the urban economy
will be and, as a result, urban centers or inner cities lose competitiveness and
attractiveness due to an acceleration of urban decay. Their cities, and those in Western
Europe and Japan, are indeed becoming ―more similar, but not as the result or actions by
government‖ (Sancton, 1993, p. 8).
In this project, two sets of cities represent the strong dependence of a single main
industry on the local economy. For decades, Detroit and Pittsburgh have represented the
automotive industry and steel industry, respectively, in the United States. Once called
―Motown‖ and ―Steel City,‖ they enjoyed a great degree of economic and cultural
prosperity, but are struggling in the current economic decline. However, between two
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cities, we can see the mixed signs of recovery. Whereas Detroit deals with same old
problems — not only economic decline but also continuous social issues— Pittsburgh has
shown some promising recovery. I also look at the Korean cities of Ulsan Metropolitan
city and the City of Pohang. As the Mecca of the Korean automotive industry, Ulsan
Metropolitan city seems to have recovered rapidly from the 1997-1998 Asian economic
crisis and has confronted international market forces. Ulsan Metropolitan City did not
seem to lose its significant position in the national economy after the decentralization and
sustains local prosperity today. The relationship of the steel industry to the City of
Pohang is quite different from the relationship of the steel industry to Pittsburgh. Unlike
Pittsburgh, where the local economy has been restructured significantly, moving from a
single dominant industry to a fragmented industrial structure, the City of Pohang remains
―POSCO‖ (Pohang Steel Corporation) city, and does not show signs of any significant
local economic restructuring efforts. These cases not only show the influence of
international market forces but also indicate that national and local contexts do matter in
determining local economic development pathways even though the implementation in
those local contexts varies.
Korean cities have not received equal interest to American cases in urban research
fields mainly because of the country‘s long history of a strong national government.
Rapid economic development in Korea over the last three decades has been the result of
the government‘s strict national economic development plan, which allowed little room
for local governments to determine their own fate— until the 1991 Local Autonomy Act.
The 1991 Local Autonomy Act opened the door for more participants to make decisions
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about local economic development, thus altering the dynamics of local political choices.
These recent changes have made drawing attention to dynamics in local Korean
economic development more relevant. Does a city choose a similar pattern due to a
similar economic structure and to the similar pressures of globalization? Does a city have
the power to control not only capital but also labor despite its limited resources? If so,
then why do some cities struggle more than others to resolve their economic recessions?
What are the determinants of local economic development in the manufacturing industry
cities of South Korea? Do the late-comers, such as Korean industrial cities, show similar
types of local economic development to the old industrial cities in the United States?
Does a nation's institutional environment play a role in determining local economic
development pathways?
To answer this question, economic logic and political logic serve as two relevant
strands of thought. According to Peterson, cities vie in a competitive marketplace and
have to promote economic growth as part of an ―economic logic.‖ The primary interest
of cities is the maintenance and enhancement of their economic productivity (Cohen.
1996, p. 15). As a result, if cities devoted themselves to development policy as a primary
strategy, they would be more affluent than others and would be their only way to survive.
Political logic stresses that internal political forces shape urban development choices.
According to this perspective, cities are not business corporations but rather political
entities whose leaders must build coalitions and win political support. This political logic
contains the relationship levels of government (Cohen, 1996, p.29-31). Clarke and Gaile
explain the importance of local political processes as ―more than a matter of new
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interests‖ (1997, p. 29). However, neither economic logic nor political logic alone
provides a sufficient answer to the local dynamics of transitional states such as South
Korea. The fact that some local economies that in the past were considered successful
cases but now reveal diverse problems, whereas others are still performing relatively well
raises new questions regarding their differences and determinants. Simultaneously,
localities seem to show variance in their local economic development paths despite the
country‘s long history of a strong central government. So, what causes the variance in
local economic development patterns?
To understand the determinants of variance in local economic development, I will
begin by looking at modes of governance. Crouch et al. (2001, 2004) provide a rich
framework for understanding how local economies differentiate in national contexts.
Couch et al. posit that local collective goods and modes of local governance are central to
explaining the success of local economies. Using four cases (UK, Germany, France, and
Italy), Couch et al. explain that Local Collective Competition Goods are the important
driving force for the success of a local economy; they also argue that modes of
governance for enhancing local collective competition goods need to be examined in their
dynamic national contexts. Looking at the role of the market and at the community, state
hierarchy, and associations, Crouch et al. explain how to stimulate the growth of Small
Medium Enterprises through local production systems and modes of governance.
2
2
For a full explanation of local production systems and modes of governance, see Table
20.1 in Couch et al. (2004), ―Local production systems and modes of governance in
conclusions,‖ Changing governance of local economies: Responses of European local
production system.
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However, Crouch et al. fail to explain the relationship between state and local
governments sufficiently and how modes of governance can be produced by different
national contexts. In addition, their governance approach makes it relatively difficult to
examine the role of the local agency, including political and governmental officials,
because it is difficult to separate local agency from the structure of local government.
Since ―local participants in governance must work within infrastructures of local
government and politics anchored at higher levels of states and must take account of the
social and spatial arrangements distinctive of each urban region‖ (Crouch et al., 2004, p.
21), the importance of local agencies to local economic development must be considered
within national and local government structures. To complement the weakness of this
approach, I draw upon Sellers‘ ―local choice‖
3
analysis. In his book, Governing from
Below, Sellers provides a rich explanation as to why certain local outcomes differ from
others with types of urban policy syntheses. This explanation will be significant to
comprehending the possible roles of local governments and local leaderships in
determining the destiny of locality because urban governance shapes the social and
spatial structures that figure prominently in urban politics. Considering the importance of
local choices to national and local development policy, the role of local actors and the
determinants of local economic development must be examined with consideration of
local industrial structures.
3
For a full explanation of ―local choice‖ in cities, see Chapter 6. ―Urban Governance and
the Global Economy‖, in Sellers (2002), Governing From Below.
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In addition, a leading explanation of the determinants of local governance is
regime theory. Regime theory, particularly Stone‘s social production model, is based on
the conception of political power as a means of accomplishing the goals of local
government: power to, not power over. The pursuit of political power leads to the
formation of information governing coalitions among private-sector businesses and
community leaders and government officials (DiGaetano, 1997; Stone, 1993). However,
without taking into consideration external factors such as international market forces, the
characteristics of different industries, and nation-state political structures, gaining a
deeper understanding of how each locality chose a different local economic development
pattern— in spite of a similar economic situation— remains difficult.
1.4.Hypotheses
First Hypothesis: International Market Situations and Locality
To understand what determines the direction of local economic development in
each city, I examine three plausible explanations. The first explanation considers the
different relations between the impact of international market forces and the pattern of
local economic development. Responding to different influences by international market
forces on local industry, economic development patterns are shaped by how they adjust to
change. Some cities adapt more flexibly than others, and this resilient adaptation leads to
different local economic development patterns.
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Variance in local economic development patterns is a new consideration that has
rejuvenated the study of localities. Local economic development may be defined as
increases in the ―local economy‘s capacity to create wealth for local residents.‖ Such
increases occur if local resources, such as labor and land, are used more productively.
Economic development can occur through local job growth, which causes unemployed
labor and land to be used. But economic development also occurs by shifting employed
labor and land to more productive uses, for example to better jobs. Local economic
development is arguably affected by all local government activities. However, local
economic development policy is usually defined more narrowly as specific activities
undertaken by public or private groups to promote economic development.
There are several possible lenses through which to regard the variance of local
economic development patterns in relation to globalization and the relationship between
state and local governments. Bringing localities into the analysis of globalization is a
central contribution of world cities and global cities studies. Current globalization
discussions offer a way of rethinking the importance of ―locality‖ as well as of
transforming the role of the state. Held et al. have described the impact of globalization
as ‖a powerful transformative force that is responsible for a ‗massive shake-out‘ of
societies, economies, institutions of governance and world order‖ (Held et al., 1999, p. 7).
In the name of globalization, states have experienced massive changes from the inside
and outside. From the outside, states are confronting the challenges of ―the hyperglobalist
perspective,‖ which suggests that, ―traditional nation-states have become unnatural, even
impossible business units in a global economy‖ (Ohmae, 1995, p. 5).
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In contrast to the declining role of state and to ―borderless world‖ debates in the
globalization era, the increasing importance of local/regions is another noticeable subject
in the study of urban politics. Focusing on the mobility of capital at both the national and
transnational level, some scholars are paying attention to the important roles of individual
cities. Increased capital mobility requires a new understanding not only of the changing
role of the states but also of local places of productivity and the production of labor
(Knox & Taylor, 1995; Sassen, 2000; Savitch & Kantor, 2002; Thorns, 2002). Jessop
(1998) points out that globalization has intensified interurban struggles over resources, as
cities try to establish more business-friendly environments to attract new investors
(Jessop, 1998, 2002). Jessop (1998) has argued that such a business-friendly environment
has made cities ―more significant nodes and vectors in organizing economic, political,
and social life‖ than ever before (p. 79).
The pressure of globalization, the relatively free mobility of capital, and new
economic markets such as China and other developing countries that provide lower labor
costs are all having a direct impact on the domestic economic restructuring process. The
combination of these international economic changes are accelerating the economic
transition from traditional manufacturing to high value manufacturing and advanced
services referred to as a ―knowledge economy.‖ As a result, developed states, as well as
developing states that concentrate on export-oriented industrialization, have been deeply
affected by global economic change. With changes in the international economic
environment, localities in many countries are aware of the growing power to influence
national economic policies, recognizing the uneven territorial development. In order to
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get a clear picture of the variance in local economic development and the major
influential factors, I will look at cities in different political settings. As we shall see,
different international market situations have forced different local economic
development paths. For example, the steel industry in Pittsburgh completely shut down in
1980, thus workers and the business itself did not face a gradual fade away effect. Local
government needed to survive with this new situation and thus had to look at diverse
options to promote new industries.
Through international market competition, different industries have diverse
impacts on the local economy. For example, the automobile industry in Detroit and the
steel industry in Pittsburgh have shaped local economic development. Unlike the
automobile industry, the steel industry did not lose complete advantage over time.
According to Morici (2005), the steel industry did not lose its position in the national
economy as significantly as other durable and nondurable goods industries. Because
steel is a relatively small component of cost in most steel-related goods, other industries
such as the automotive industry face serious challenges while steel industry has been
affected relatively less (Morici, 2005, pp. 3-6). International economic conditions have
favored the steel industry over the automotive industry. Therefore, a city-based industry
favored by international conditions tends to direct its development path differently.
This pattern would be modified in developing countries, particularly in South
Korea. Even though international market forces influence Korea‘s national economy as
well as its local economies, as a late-comer, Korea still has a relative advantage in labor
and pricing, thus the impact of international market forces on local industries is less
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severe. Simultaneously, one significant difference between U.S. cases and Korean cases
is a national economic development plan. For three decades the Korean economy has had
a partially planned economy, which means that certain regions and cities have received
greater advantages than others and that there is therefore variation in local economic
capacities.
Second Hypothesis: Nation’s Institutional Environment
Another explanation considers the impact of national state political structure on
patterns of local economic development. Savitch and Kantor argue that, ―depending on
the political system, governments at the national, state and provincial levels have
established urban development corporations, urban enterprise zones, and urban service
districts that reach across central cities and suburbs‖ (2002, p. 38). In addition, many
researchers have explored the impact of national economic and political forces on local
governance emerging from the regulation school, and have also observed that national
economic and ideological forces are likely important factors in framing local activities
and governmental choices (DiGaetano 1997, 1999; Keating 1993; Mayer 1995). Fagan
and Heron (1994) have also argued that a nation state is not the natural space for the
circulation and reproduction of capital, which is vitally important to understanding the
restructuring of economic activity since the mid-1970s.
Different national political systems influence variations in local economic
development patterns. In addition, institutional reform creates more competition in both
system and local economic development. Suprerlocal influence may also redirect local
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economic development. For example, in the American federal system, a city does not
have constitutional guaranteed power and is thus not a de jure but rather a de facto entity.
Cities are creatures of the state and states have generally delegated development power to
localities (Jacobs 2003a, 2003b). In general, the federal system tends to create more
competition among local governments, and local governments may create different
relations with different levels of government. Some cities may have a closer relationship
to the state government than to the federal government. As a result, competition for
resources tends to disperse based on support from different levels of government. Since
President Nixon declared the urban crisis in 1972— and then dramatically reduced the
flow of federal subsidies to cities— American local governments have become less
interested in managing residential services and more preoccupied with devising and
investing in strategies that might stimulate economic development (Harvey, 1989).
Moreover, Harvey has argued that although cities have always competed for resources,
the shift toward entrepreneurialism pushed community leaders to amplify their efforts to
―sell‖ their city. This entrepreneurialism trend in localities has intensified interlocal
competition in the United States. Moreover, new federalism has exerted a more direct
relationship between federal and local governments, which has intensified interlocal
competition for federal aid.
On the other hand, in the Korean unitary system, a strong central government
guided and planned national economic development, and localities followed national
guidelines before 1991. After 1991 in Korea, with the Local Autonomy Act, cities began
competing with each other to obtain the support of the central government; previous
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―favored cities‖ needed to compete with other cities for national government resources.
Local governments began to fight and to compete with each other to obtain the central
government support that once was reserved support for certain regions. This institutional
change may have lead to different city development patterns that became more sensitive
to the central government‘s development direction. In a unitary system, the central
government maintains control over local affairs but its ―old‖ guideline does not include a
detail blueprint after the initial establishment. Therefore, once a certain type of
manufacturing industry is embedded, it is somewhat difficult to say whether a unitary
system‘s central government still exercises full control over local economic development.
In the case of Korea, since the 1991 Local Autonomy Act, the national government has
functioned as a store of resources, giving more room for local governments to be in
competition.
The resilience of the local economies in both sets of cities during the economic
recession must be examined within their respective political settings. For example, even
with the severe economic recession of 1997-1998, Korean cities (Ulsan and Pohang) did
not collapse and, in fact, recovered rather rapidly. Furthermore, Ulsan and Pohang
recently became more environmentally cautious cities, with their annual white paper
clearly mentioning this development. They seem to be more focused on ―quality of life‖
than before. Notably, however, this phenomenon is difficult to examine within the
―strong central government guidance-weak local government follow‖ dichotomy.
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On the contrary, Detroit and Pittsburgh still struggle from the long economic recession
and economic decline despite their long histories of local autonomy. Therefore, it is
useful to investigate whether different political structures make a difference in local
economic development patterns.
Third Hypothesis: Asset Specificity in Localities
The third explanation for variations in local economic development relates to
understanding asset specificity in the regions. How local industrial structures and
relationships to asset specificity affect local economic development is loosely rooted in
the transaction cost approach (Williamson 1975, 1985, 1991). The type of asset
specificity that exists in a region will affect the local government‘s economic decisions. If
a single dominant industry has ruled the local economy, the industry‘s interest tends to be
a priority for local economic development, whereas a diversified industrial structure
means more factors in the local government‘s economic decisions.
While business maximizes profits, political decision-makers pay more attention to
efficiency of policy with or without cooperation from the business sector. However, due
to the imperfections of information flow and to growing market and political uncertainty,
both parties try to obtain optimal results, which reduces potential transaction costs.
Transaction costs can be deleterious to both parties and are greatest when asset specificity
is high. Human asset and physical asset specificity are relevant to understanding the
complexity of local economic development. If an industry conducts its economic activity
for a long time, it may create specific human assets to fit that industry. Local labor
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markets develop the kind of specific skilled workers required by the particular industry
and whose labors do not easily transfer to more general companies. Experienced steel
workers cannot be replaced by unskilled managerial workers. As a result, the region that
contains a high level of human asset specificity tends to follow the specific industry‘s
interests when decisions around local economic development need to be made. Physical
assets play an important role in deciding transaction costs. If the region produces
noninterchangeable products among industries, regional physical assets became more
specific. In this case, the impact of a particular industry on the local economy would be
increased and the relationship between business and local governments would be less
cooperative due to the importance of the specific industry in the region.
The degree of industrial concentration also plays an important role in
understanding pathways of local economic development. The specificity of a local
industrial structure can be defined as the level of concentration of a given industry. If
one or a few main industries dominate a local economy, a high level of sectoral asset
specificity is expected. Whether a single dominant industry has existed, or more
diversified industrial structure has emerged in the region, significantly shapes local
economic development. If a single major industry exists in a locality, its asset-specific
investments can overwhelm other industries. Once asset-specific investments are
stabilized in a locality, dependence on the region‘s monopoly industry in the region
cannot be ignored in local economic development plans.
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1.5.Tentative Answers
This research focuses on the impact of a city‘s political and economic contexts on
its local economic development pathway. Four cities show not only international market
force but also demonstrate that national and local contexts do matter in determining local
economic development pathways even though the implementation of each context in the
locality varies. In particular, international market change bears a more direct impact on a
single dominant industry-oriented city such as Detroit than on cities with a fragmented
industry structure like Pittsburgh. The Korean cases show more interplay among
international market forces, national government, and industry structure than do the
United States cases. Even after a decentralization process, manufacturing cities in Korea
tend to receive less direct impact by international market force because of their previous
involvement in the international market as well as their economic importance to the
national economy. While the decentralization process in Korea provides positive
opportunities to enhance local capacity in Ulsan Metropolitan City, the same process can
be a constraint in the city of Pohang because of its single dominant-industry structure.
Secondly, the difference of institutional environment influences pathways of local
economic development through the role of national governments. For example, in a
federal system, cities tend to have more autonomy in deciding local affairs, compared to
cities in a unitary system such as Korea, which is regarded as a developmental state.
Cooperative or conflicting local interests among different players shape local economic
development. If involved players such as national and local governments and business
share similar or cooperative local interests, local economic development pathways show
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the outcome of their compromising local interests. For example, Pittsburgh‘s well-
established public and private partnership has been one of the main factors in the city‘s
economic rebound after the collapse of the steel industry. In the case of Korea, Ulsan
fosters cooperative local interests for one purpose: sustaining Ulsan as ―Industrial Capital
of Korea.‖
The growing importance of asset specificity impacts local economic development.
The number of different asset specificities in a region determines the pathways of local
economic development. For example, Detroit‘s low level of human assets positively
affects the business‘s relocation decision while the city government becomes more
vulnerable to the business‘s economic activity. As a result, Detroit‘s economic
development pathway is either to follow the dominant industry‘s interests or to seek
alternative options such as federal support programs (i.e., Empowerment Zone Program
and Renewal Communities).
Even though each city shows similarities and differences through three plausible
explanations of local economic development pathways, Detroit and Pittsburgh offer a
glimpse of the possible future of Korean cities regarding industry structure and public
and private partnership. Local community in the Korean cases has been a missing link to
establishing economic governance in a locality.
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Lack of community involvement and interest in local economic development as well as a
rigid industry structure can be the downfall of the city of Pohang, whereas the direct
involvement of international market forces and weak community participation will affect
Ulsan‘s future economic development negatively. Future economic prosperity in
manufacturing cities varies based on establishing local economic governance in the
nation‘s institutional environment.
1.6.Structure of the Dissertation
There are five remaining chapters in the dissertation. Chapter Two offers a
historical overview of two sets of cities in different political settings, including a
discussion of demographic changes, socioeconomic change in 1990-2005, and industry
structures. Chapter Three will investigate the impact of international market forces on
localities through different local industries— in particular, the degree of international
market involvedness in each city. Chapter Four discusses the nation‘s institutional
environment in two political settings: the federal system and the unitary system. In
addition, intergovernmental relationships in federal system (US cases) will be extensively
discussed as well as the roles of federal government. Korean cases will cover the
institutional changes, particularly the decentralization process after 1991 and the 1997
promotion of a metropolitan government (Ulsan), and the relationship between national
government and local government before and after the decentralization. Chapter Five will
discuss the relationship between business and local government in each city and how a
single dominant-industry structure and fragmented industry structure interplay with local
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governments. In particular, asset specificity and its impact on localities are extensively
investigated. In closing, Chapter Six will summarize the findings of each hypothesis and
synthesize a framework for understanding what influenced different or similar local
economic development pathways in different political settings.
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CHAPTER 2: CASE OVERVIEW: FOUR CASES, TWO SETTINGS: DETROIT
AND PITTSBURGH VS. ULSAN AND POHANG CITY
2.1.Introduction
Every city places a priority on ―growth.‖ However, how to develop and what to
develop are different based on the political, social, and economic conditions of the
locality. Moreover, how to allocate limited resources can test local capacity. Since
resources are limited, local governments need to maximize them in order to achieve their
goals. Though methods of maximizing limited resources vary, local economic
development patterns can offer some good examples to local governments— and not just
in service-oriented or technology-concentrated cities. This project pays particular
attention to old industrial cities such as Detroit and Pittsburgh because they have either
suffered from several economic recessions or from mixed signs of economic
restructuring. Globalization has placed serious external pressure on localities to choose
to survive or to wither. Once old industrial cities entered postindustrial status, they could
not afford to make a sudden transformation into a service-oriented city because certain
service industries could not survive without the manufacturing industry. At the same
time, certain manufacturing industries could not move too easily from one place to
another because of the initial setting process and relations with national governments.
Three different local economic development patterns merit discussion: urban
redevelopment, local economic reshaping from traditional manufacturing industry to high
technology and service industry, and maintaining the existing industry. The direct and
indirect determinants of local economic development in manufacturing cities are (a) the
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impact of international market competition and the characteristics of industry, (b) the
nature of different national political structures and relationships among national and local
governments and businesses, and (c) local governance. More specifically, levels of
federal aid and support play a constraining role in local economic development. Also
characteristics of business often determine the direction; for example, if there is more
localized business, more manufacturing industry, or more service industry in a locality
can have an impact. In addition, characteristics of industry such as heavy/traditional
industry, high technology, or advanced manufacturing industry impact decisions. Finally,
local government capacity from embedded socioeconomic conditions and historical
legacy shape governance and indicate the direction of local economic development.
These elements are interconnected with local choices that impact economic development
patterns.
International economic situations impact the local economy directly and
indirectly. The degree of impact may be different in different industries such as the
automobile industry and the steel industry. But the recent international economic
situation has impacted local economies based on different industry conditions. However,
international market competition alone does not provide a sufficient answer as to why
local economic development varies in the two countries. Even though the Michigan
area‘s automobile industry declined, it did not lead the overall U.S. automobile industry
to a complete collapse. Southern states promoted more assembly factories while the
Detroit area failed to attract them. Whereas characteristics of industry influence patterns
of local economic development, so too does the nature of the national political structure.
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Clearly, different national political structures influence the path of local economic
development, as seen in the diverse experiences of Germany and France.
4
My argument
goes further, positing that the nature of different national state structures construct
different local capacities not only in the growth of the service centre but also in
manufacturing cities because differences in the state structure (such as federal and unitary
systems) are heavily embedded in a locality from before the postindustrial city status
because of competition among localities. However, international market situations with
different characteristics of industry and national state structures do not provide a full
answer as to why different cities with similar economic structures show different types of
local economic development. These two previous forces may have more impact on the
establishment of local governance and only indirectly influence local economic
development. Local political capacity and the characteristics of nongovernmental actors
directly impact local economic development.
4
For more discussion on this issue, see Sellers, Governing From Below, Chapter 3.
33
Table 2.1 General Characteristics of Four Cities
Detroit Pittsburgh Ulsan Pohang
Industry Type Relatively concentrate on one
major industry (automobile)
Diversified industries (service,
advanced manufacturing, steel
industry)
Diversified within the
manufacturing industry
(Automobile, Petrochemical,
Shipbuilding)
Single dominant industry (Steel)
Intergovernmental
Relations
Relatively strong with the
State government and Federal
government.
Federal government supports
Relatively strong tie with the
State government
Moderate tie with the federal
government.
Strong time with county
government
(Allegheny County)
Command and control
After the 1991 Local
Autonomy Act: mutual
collaboration
Still maintain relatively strong
national government supports
Command and control.
After the 1991 Local Autonomy
Act: collaboration
Still national government support
is relatively strong due to the steel
company
Economic
conditions
Early industrial restructuring.
Declining major
manufacturing industry,
failure to promote new
advanced industry.
Early economic restructuring
through Renaissance I
Economic restructuring
Maintaining dominant existing
industries.
Expansion of the scope of
related industries.
Maintaining dominant industries.
Expansion of the scope of related
industries
National economic
development plan
No No Yes Yes
Local economic
development
patterns
Urban Redevelopment
Federal Program Focus
Downtown redevelopment.
New industry promotion such
as healthcare and high
technology through public
private partnership
Maintaining existing
industries.
Promoting related new
industries with spatial
expansions
(new industrial parks.)
Spatial expansions for the existing
industries
34
2.2.U.S. Cases: Detroit City and Pittsburgh City
City of Detroit
Detroit is a symbol of the economic, political, and urban issues facing American
society. Motor City‘s Big Three—General Motors, Ford, and Chrysler— led Detroit‘s
growth and its spatial development. Under the Big Three‘s movements, the institutional
life of Detroit and the live of millions people have been structured and restructured.
5
However, for several decades, Detroit has been one of the drastic failures among the old
industrial cities in the United States, with social issue such as racial tension as well as a
serious decline in its local economy. In 1950, Detroit had a population of 1.850 million;
the department of commerce projects that its population in March 2004 would be
914,000. Factories that once housed heavy industrial facilities have been abandoned.
Since 1970, approximately three-quarters of Detroit‘s manufacturing jobs have been lost.
As indicated in Table 2.2, below, while central city has lost the majority of its population
since 1970, the population in the suburbs kept growing and the percentage of population
in suburbs between 1970 and 2003 was approximately 20%.
5
Crisis in the motor city: The politics of economic development in Detroit by Richard
Child Hill
35
Table 2.2 Total Population and Population Change Since 1970: Detroit City
Detroit, MI PMSA Detroit City, MI Suburbs
1970
4,490,902 1,511,336 2,754,261
1980 4,387,783 1,203,339 2,983,088
1990 4,266,654 1,027,974 3,044,534
2000 4,441,551 951,270 3,293,831
2003 4,463,408 912,472 3,355,233
Change in Total Population (%)
Detroit, MI PMSA Detroit City, MI Suburbs
1970 to 1980 -2.3 -20.4 8.3
1980 to 1990 -2.8 -14.6 2.1
1990 to 2000 4.1 -7.5 8.2
2000 to 2003 0.5 -4.1 1.9
1970 to 2003 N/A -39.6 19.6
Source: SOCD Census Data: Output for Detroit City, MI
The dichotomy between the growing suburbs and the declining inner city has been
an important issue in urban politics. The suburban population‘s dominance over the
central city is not a new phenomenon in Detroit. Despite population changes between the
suburbs and central city in the Detroit area, changes in the racial profile shows continuing
residential segregation patterns between African Americans and Whites. Table 2.3,
below, indicates the change to the racial-ethnicity composition in the Detroit area, the
City of Detroit and the Suburbs since 1980, and shows that the population of African
Americans in Detroit city has consistently grown from 63% to 82% in 2005, whereas
close to 88% of the suburbs in 2000 was White, non-Hispanic. Other races, such as Asian
and Hispanic, constitute a fairly small portion of the whole population in both the suburbs
and the central city.
36
Table 2.3 Change of Racial-Ethnicity in Detroit
Race Year Detroit
Area*
Detroit
City, MI
Suburbs*
White, Non-Hispanic
1980 76.6 33.4 93.7
1990 74.4 20.7 92.8
2000 69.9 10.5 88.4
2005 ACS 69 9.2 No Data
Black, Non-Hispanic
1980 20.3 62.7 3.8
1990 22.1 75.5 4.1
2000 22.7 81.2 5.3
2005 ACS 22.7 81.8 No Data
Other Races, Non-
Hispanic
1980 1.4 1.5 1.2
1990 1.7 1.2 1.7
2000 4.6 3.4 4.2
2005 ACS 4.9 3.3 No Data
Total Hispanic (All
Races)
1980 1.6 2.4 1.2
1990 1.8 2.6 1.4
2000 2.9 5 2.1
2005 ACS 3.4 5.6 No Data
Source: SOCD Census Data: Output for Detroit city, MI
The economic gap between the central city and the suburbs also shows the
potential challenges for the central city. The city-suburb income gap has been growing
over time. For example, between 1979 and 1999 the city of Detroit‘s per capita income as
percentage of suburban per capita income steadily dropped from 66% in 1979 to 54% in
1999.
6
Loss of population also indicates loss of labor force in the Detroit area.
6
See David Rusk, Inside game/outside game: The case for regional equity, , p. 11, Table
8.
37
As seen in Figure 2.1, below, the central city of Detroit has lost its labor force
significantly since 1970— approximately 40%— whereas the suburbs‘ labor force almost
doubled, going from 34% to 58%). Between 1970 and 1990, labor force loss in the
central city was severe due to the serious economic decline.
Figure 2.1 Change of Labor Force, Detroit Area
-60
-40
-20
0
20
40
60
80
1970-1980 1980-1990 1990-2000 1970-2000
Change of Labor Force, Detroit
Detroit, MI PMSA
Central citg of:Detroit city, MI
Suburbs
Source: SOCDS
Detroit‘s major industries have been automobile manufacturing, and still the
automobile industry serves as an important economic force. However, after the Big
Three‘s restructuring process in the 1980s, the city lost almost 39% of its manufacturing
jobs, which became one of the main causes of local economic decline. Though Detroit‘s
downward movement began earlier, in the 1970s, the main trigger is found in the collapse
38
of the Big Three automobile companies, who accelerated their outsourcing process to
low-wage regions. Economic decline revealed the serious poverty level in the city. The
city of Detroit‘s poverty rate has heavily increased since 1979. The rate was highest in
1993, at 40%, then decreased to 27%. The striking difference in the poverty rate between
central city and the Detroit suburbs shows how much the former has suffered from the
serious economic decline.
Table 2.4 Poverty Level in Detroit
Year
Detroit, MI
PMSA
Detroit City Suburbs
1969 8.4 14.7 4.9
1979 10.2 21.9 5.4
1989 13.1 32.4 6.3
1993 estimated 16.1 39.6 7.9
1995 estimated 13.3 33.1 6.5
1997 estimated 11.8 30.8 5.9
1998 estimated 11.5 29.7 5.9
1999 10.7 26.1 5.9
2003 estimated 11.3 26.8 6.7
Source: SOCDS Census Data: Output Data Detroit City, MI
In order to revive the deteriorating city economy, federal support has gone to the
city of Detroit since 1993. In fact, in 1993 Detroit was one of the first cities to receive
the federal Empowerment Zone Program Fund. The Empowerment Zone/Enterprise
Community (EZ/EC) Program was established in the fall of 1993 under the Federal
Omnibus Budget Reconciliation Act and was part of the Clinton Administration‘s
community revitalization strategy. On December 21, 1994, round I of urban EZs were
39
Atlanta, GA, Chicago, IL, New York, NY (Upper Manhattan), New York, NY (Bronx),
Cleveland, OH, Baltimore, MD, Detroit, MI, Camden, NJ, Philadelphia, PA, and Los
Angeles, CA. Each round I urban Empowerment Zones received $100 million in
performance grants for job creation and job-related activities. Also, Michigan state
created Renaissance Zones, including the city of Detroit Renaissance zone, which to
promote its declining local economy allowed businesses located within its boundaries to
be free of all state and local taxes. In the zone, manufacturing and warehouse sites with
development potential offer an ideal location for Canadian companies seeking a U.S.
base, with proximity to major freeways, rail lines, waterways and international air
service, NAFTA superhighway links, and easy access to 50% of the population of the
U.S. and Canada are included. This zone combines industrial, commercial, and residential
sites, and seeks cooperation among different levels of government to promote local
economic development.
7
The question is, then, why has Detroit‘s economic development
still not revitalized despite these various attempts?
City of Pittsburgh: Transition Without Federal?
The city of Pittsburgh has similar issues to the city of Detroit regarding serious
economic decline since the 1980s. Due to the dramatic loss of manufacturing jobs, the
population in city of Pittsburgh has been reduced from 520,000 in 1970 to 330,000 in
2003; thus, the city of Pittsburgh lost approximately 38% of its population in 33 years.
7
The Michigan Economic Development Corporation, Michigan Renaissance Zones
http://ref.michigan.org/medc/services/sitedevelopment/renzone/index.asp
40
However, between 2000 and 2003, the population changed slightly around 3%, which
indicates that the city is trying to maintain its population. The population growth gap
between the central city and suburbs is relatively big in the Pittsburgh area also. Between
1970 and 1990, one of the main reasons for population loss was the decline of the
region‘s steel industry. In the 1980s, U.S. Steel and related steel companies experienced a
series of economic crises. Population decline has been one of the major concerns in the
city of Pittsburgh and the discrepancy between the central city and the suburbs has
become wider since the1980s. Comparing the Pittsburgh MSA and the central city, the
population decline is much noticeable. Between 1990-2000, population decline rate in the
Pittsburgh MSA reached -1.5%, whereas the Pittsburgh city presented -9.5% of
population loss in the same period.
41
Table 2.5 Total Population in Pittsburgh Area
Year Pittsburgh, PA
MSA
Pittsburgh City, PA Suburbs
1970 2,683,853 520,167 2,163,686
1980 2,571,223 423,938 2,147,285
1990 2,394,811 369,879 2,024,932
2000 2,358,695 334,563 2,024,132
2003 2,336,617 325,599 2,011,018
Change in Total Population (%)
Pittsburgh, PA
MSA
Pittsburgh City, PA Suburbs
1970 to 1980 -4.2 -18.5 -0.8
1980 to 1990 -6.9 -12.8 -5.7
1990 to 2000 -1.5 -9.5 no data
2000 to 2003 -0.9 -2.7 -0.6
1970 to 2003 no data -37.4 -6.4
Source: SOCDS Census Data: Output for Pittsburgh city, PA
8
Population change in Pittsburgh was followed by changes to the racial profile.
Table 2.6, below, shows the area‘s racial ethnicity change over time. Whites have
comprised a relatively large portion of the population both in the central city and the
suburbs. In the central city, the White population did not change much— from 74% to
64% in two decades. Interestingly, the growth rate of the African American population in
the central city is not significant. Between 1980 and 2005, the population of African
Americans increased by less than 1%. Besides the White and African American
population, other racial groups such as Hispanics and Asians did not represent a
8
State of the City data system (SOCDS)
http://socds.huduser.org/Census/totalpop.odb?msacitylist=38300*4200061000*1.0&metr
o=cbsa
42
substantial amount of the whole population, at less than 7% total. This population trend
shows that racial profile among different racial ethnicity group in the Pittsburgh city has
not been changed even though the crucial economic crisis has been occurred in the region.
Table 2.6 Change of Racial-Ethnicity in Pittsburgh Area
Year Pittsburgh
MSA
Pittsburgh
city, PA
Suburbs
White, Non-Hispanic
1980 92 74.3 95.4
1990 91.4 71.5 94.9
2000 89.3 66.9 92.9
2005 ACS 88.8 63.6 92
Black, Non-Hispanic
1980 6.9 23.9 3.6
1990 7.3 25.7 4
2000 7.8 27 4.8
2005 ACS 7.8 28.8 4.8
Other Races, Non-Hispanic
1980 0.6 1.1 0.5
1990 0.8 1.8 0.6
2000 2.2 4.8 1.7
2005 ACS 2.6 5.9 2.2
Total Hispanic
(All Races)
1980 0.5 0.8 0.4
1990 0.5 0.9 0.4
2000 0.7 1.3 9.6
2005 ACS 0.8 1.8 0.7
Source: SOCDS
The impact of the U.S. steel industry in Pittsburgh has been tremendous.
Pittsburgh‘s long-standing specialization in the steel industry was a symbol of the
American manufacturing industry until the 1970s. In early 1980s, the collapse of the steel
industry resulted in the heavy loss of manufacturing jobs. Between 1980 and 1986
manufacturing employment decreased by 42.6%, one of the main causes of local
43
economic decline. The dramatic change to the U.S. Steel industry plays an important part
in explaining Pittsburgh‘s economic situation, including its restructuring of the local
economy. In the 1980s, the U.S. steel industry experienced a drastic economic decline
mainly due to the international competition. In the 1980s, more than 250,000 workers in
the U.S. steel industry had to leave their jobs. The production of raw steel in the U.S. has
declined by more than 12%. The U.S. steel industry‘s share of the world steel market fell
to approximately 10%, and integrated steel firms in developing countries such as South
Korea became leaders in production efficiency, which supported a dramatic rise in
profitability and market share. The Korean firm POSCO is arguably the world‘s most
profitable integrated steelmaker (Fruehan, Cheij, & Vislosky 1997). For the past decades,
the Pittsburgh area‘s growth has lagged behind that of the nation as a whole. However, in
the 1990s, Pittsburgh attempted to revitalize the regional economy, an effort that has been
termed the ―Pittsburgh Transition‖ (Deitrick, 1999).
Changes to the labor force also show the Pittsburgh area‘s economic struggles.
As seen in Figure 2.2, below, the loss of labor force in Pittsburgh city was relatively
serious. Between 1970 and 2005, Pittsburgh city lost almost 28% of its labor force while
the Pittsburgh suburbs rose 23% in its new labor force. In relation to the loss of labor
force, the unemployment rate in Pittsburgh area indicates severe economic difficulties.
The unemployment rate in Pittsburgh city in 1970 was approximately 5%, but the rate
drastically increased to 10% in 2000.
44
Figure 2.2 Change of Labor Force, Pittsburgh City
-40
-30
-20
-10
0
10
20
30
1970-1980 1980-1990 1990-2000 2000-2005 1970-2000 1970-2005
Change of Labor Force, Pittsburgh city, PA
Pittsburgh MSA
Pittsburgh city, PA
Suburbs
Source: SOCDS
The poverty level in the city of Pittsburgh shows that the city is still struggling
from the past economic decline. In the central city, the poverty rate consistently
maintained around 20%, compared to approximately 10% in the suburbs. Suffering from
a relatively high poverty level in old industrial cities is not a new phenomenon in the U.S.
However, the difference between the city of Detroit and city of Pittsburgh regarding the
poverty level explains the relatively narrow gap between the economic situation in the
central city and in the suburbs.
45
Table 2.7 Poverty Level in Pittsburgh Area
Year Pittsburgh, PMSA Pittsburgh City Suburbs*
1969 10.1 15 9
1979 9 16.5 7.7
1989 12.1 21.4 10.5
1993 estimated 13.1 23.3 11.4
1995 estimated 11.5 20.2 10.1
1997 estimated 11.3 20.2 9.8
1998 estimated 11.1 20 9.6
1999 10.8 20.4 9.4
2003 estimated 10.6 19.1 9.3
2005 ACS 11.4 23.2 9.7
*Estimated poverty rates for 1993, 1995, 1997, 1998, and 2003 are derived from the
Census Bureau's Small Area Income and Poverty Estimates.
Source: SOCDS Census Data: Output for Pittsburgh city, PA
Compared to the city of Detroit, the city of Pittsburgh shows somewhat mixed
results. Despite the serious collapse of steel mills and significant job losses, Pittsburgh
has shown resilience; the collapse of the steel industry led to the economic restructuring
of Pittsburgh—or the ―Pittsburgh transition‖ (Clark, 1989). Research shows that the
public-private partnership model transitioned in the 1980s from its traditional corporatist
style of organization to the inclusion of nonprofit organizations such as the expert group-
based involvement of universities, foundations, and community-based organizations.
Some have argued that a business-government growth coalition, the Allegheny
Conference on Community Development, led Pittsburgh‘s renewal efforts. The impact of
big business figures such as Richard King Mellon and mayor David Lawrence developed
the partnership to promote economic development.
46
Why Pittsburgh‘s economic development pattern is so different from Detroit‘s lies
in its relationship between business and local government. Allegheny County, where the
city of Pittsburgh is located, established several economic development strategies to
confront the drastic economic decline in the 1980s. In order to overcome local economic
difficulties, the Allegheny conference on community development established close
relations with business. Since Pittsburgh had a large number of corporate headquarters
and also was then the home to the U.S. steel corporation, a neat relationship between
community and business played an important role in local economic development. In
addition, local officials tried to shape the development process in their regions.
Differences and Similarities Between Detroit City and Pittsburgh City
Detroit and Pittsburgh have shared strikingly similar situations during the past
two decades with mixed results. Both had relied on one dominant industry for the local
economy and, as a result of the decline of that major industry, both have had dramatic
reductions in their populations. These population declines are one of the main indicators
of how regional economic conditions have worsened. Poverty rates have also provoked
serious concern from local governments, which are plagued by budget deficit issues.
However, several differences may shed some light on why these two cities chose
different economic development paths. The first difference is socioeconomic; both cities
have suffered significantly in past three decades but different socioeconomic
characteristics have brought about different results. Racial ethnicity profiles for both
cities reveal drastic differences in the racial proportions of the total population. In the city
47
of Detroit, African Americans have been a dominant racial ethnicity group over two
decades, and the growth rate of that population in the central city increased by about 20%
between 1980 and 2000. The city of Pittsburgh, in the same period, shows a different
picture of the African American population and the dominant racial ethnicity group
formation. Whites have been a dominant racial ethnicity in Pittsburgh city, including the
Pittsburgh suburbs area. The African American population grew less than 5% in the past
two decades.
Economic gaps between the central city and the suburbs in both cities demonstrate
are also telling. The degree of those gaps has varied. The city of Detroit may suffer from
a wider gap between the central city and suburbs than Pittsburgh city with regard to the
poverty level and other factors. Degree of loss of labor force also varies between the
cities. Whereas the city of Detroit reports close to a 37% loss of labor force between 1970
and 2000, in same period, Pittsburgh city suffered a 21% labor loss. Local economic
structures between the two cities may shed a different light on our understanding of how
the two cities have pursued different paths of local economic development. In
Pittsburgh, the new high technology industry, such as biotechnology and healthcare, has
been identified as the new leading local industry. For example, in 2007 16 new
companies opened in Pittsburgh and a majority of companies was related to life science,
Robotics, and Information Technology, and 12 Fortune 1000 companies keep their
headquarters in Pittsburgh (Pittsburgh Regional Alliance, 2008)
48
As a result of declines in their major industries, Detroit and Pittsburgh have seen
dramatic reductions to their populations. Both cities suffer from significant economic
difficulties, compared to the national average. For example, the national median
household income in 1999 was $41,994, but was $29,526 in Detroit city and $28,588 in
Pittsburgh city. Per capita income in 1999 also shows the economic difficulties of each
city. Where the national average was $21,587, Detroit city showed only $14,717 and
Pittsburgh city‘s was $18,818. The population declines are a main indicator of how
regional economic conditions have worsened. Higher education populations in each city
also show a difference. Whereas Pittsburgh still holds more than the national average of
higher education population, Detroit‘s percentage of higher education population is much
lower than the national average.
49
Table 2.8 Detroit and Pittsburgh General Characteristics Overview
Detroit city, MI
Pittsburgh city, PA U.S.
Number % Number % %
Total population 951,270 334,563
Population 25 years
and over 563,979 218,813
High school graduate
or higher 392,726 69.6 177,831 81.3 80.4
Bachelor's degree or
higher 61,836 11 57,267 26.2 24.4
in labor force
(Population 16 years
and over) 384,897 56.3 161,182 58.5 63.9
Median house hold
income in 1999
(dollars) $29,526 (X) $28,588 (X) $41,994
Per capita income in
1999 (dollars) $14,717 (X) $18,818 (X) $21,587
Family below poverty
level 47,920 21.7 11,228 15 9.2
Source: U.S. Census American factfinder 2000
2.3. Korean Cases: Ulsan Metropolitan City and Pohang City
There is little research into the reasons for different paths of local economic
development in South Korea. Possible explanations rely on the relationship between the
central government and local governments. Korea has a long history of a strong central
government, and many scholars have acknowledged the major influences of the
50
government‘s national economic plan on local economic development. As a result, the
influence of locality on national economic policy in Korea remains unexplored territory.
The Local Autonomy Act that has hibernated under a strong central government since
1949 established the direct election of mayors and local government (Korea Research
Institute for Local Administration 2005). With this Act, localities in Korea obtained a
Constitutional Guarantee for wielding more vigorous political influence over local
affairs. Simultaneously, between 1997 and 1998, East Asian countries, including South
Korea, experienced a massive economic crisis, which led to questions about the
effectiveness and capacity of the central government as well as about the roles of locality
in South Korea.
Specific regions no longer enjoy the strong central government support they had
during the rapid economic development era. Due to the decline of state intervention and
to the weakened favor of specific regions, national and local economic developments
have demonstrated changing patterns. Several regional economic indexes in South Korea
between 1990 and 2002 show a mixed reality. Seoul and Capital Regions, which include
the City of Incheon and Gyeonggi Province, dominated the share of regional GDP in
National GDP compared to non-Capital Regions. For example, most of Korea‘s
economic activity is concentrated in the Capital Regions, which produces almost half of
Korea‘s gross domestic product— 47% in 2001 and 47.7% in 2002 (SERI 2004 and
OECD Territorial Review: Seoul, Korea 2006).
51
Figure 2.3 Population and GDP Concentration in Korea
Source: OECD Policy Brief (April 2006), OECD Territorial Reviews: Seoul, Korea p. 2
In South Korea some regional dependence upon the central government has
remained steady or has gradually decreased over time, whereas other regions have shown
an increase in dependence. Over time, traditionally less developed regions have indicated
a heavy financial dependence upon the central government. Interestingly, Gyeongnam
52
(South Gyeongsang Province), which focused on the manufacturing industry, has
depended significantly on the central government‘s financial support. At the same time,
the gap between metropolitan areas and others has become significant. Overall, Seoul
shows the highest financial independence from the central government, over 80%, and
other metropolitan areas have shown a gradually increasing financial dependence on the
central government. However, except for Gyeonggi Province, provinces have shown
significant dependence upon the central government, a trend that did not change much
until recently. In 2000, the percentage of regional fiscal independence in Seoul
Metropolitan City and Capital Regions such as Incheon Metropolitan City and Gyeonggi
Province was above the national percentage (72% in Seoul Metropolitan City, 55% in
Incheon Metropolitan City, and 59% in Gyeonggi Province) (KOSIS 2006).
The industrial structure in localities has changed over time. Three charts show
patterns in the types of industry that have been shaped in the various localities. The
traditional manufacturing industry has been favored in the central government‘s
economic development plan since the 1960s. As a result, little room was left for localities
to support or oppose the national economic policy to locate traditional manufacturing
industry in their areas. The service industry did not receive particular support by the
central government and localities during the period of 1970-1980, a pattern that slowly
changed during 1980s. High technology industry emerged as one of the key industries in
Korea, and this switch toward the service industry brought significant changes to the
Korean economic structure.
53
This pattern continued into the 1990s, and after the Local Autonomy Act, Korea held a
series of interlocal competitions for national economic projects to enhance local
economic development. As such, the influence of localities on local economic
development is undeniable.
These differences evidence how local governments respond to diverse challenges,
and justify an investigation of the state‘s role in local disparity and economic
development. The degree of local differences, including regional income inequality,
regional economic development rates, and types of regional industry, did not widen or
maintain even during the decentralization process. Some localities that enjoyed local
prosperity with support from the central government remain in the dominant economic
position, but emerging regions promise prosperity through new growth strategies.
Simultaneously, less developed regions may suffer more than before because central
government‘s safety net has been reduced. Balanced regional development has been the
national goal for the past three decades, however, with the economic crisis, this goal is
difficult to maintain. Taking into consideration internal and external dynamics such as
the economic crisis and the institutionalized decentralization process, a study of why
localities show different economic development patterns will provide insight into
transformations in the relationships between central and local governments, the changing
roles of local leaderships, and other aspects.
With the decentralization process and demands for continuous development,
Korean cities have shown their capacity for local economic development, with some
cities showing promising signs. Developmental State scholars argue that the national
54
government still plays an important role in economic development policy because
―political management of the economy may be better in a world full of assets with limited
mobility, as far as this is done with an eye to long-term ‗developmental‘ goals‖ (Chang
1999, p. 192). The nation-state still effectively constrains local political choices (Pierre
1999). Indeed, local economic development strategies continue to be largely determined
by national economic policies. During the rapid national economic development era, the
Korean government set the Five-Year National Economic Development plan from 1960s
(Hahm & Plein, 1998, pp. 96-108). Through several Five-Year National Economic
Development plans, the national government decided that territorial development should
include local development. The rapid economic development era left little room to
enhance the influence of local governments and businesses due to the strong guidance of
the central government. With guidance from the central government, imbalanced
regional economic development has become deeply associated with specialized
industries, particularly the traditional manufacturing industry. Under the strong support
of the national government, Ulsan Metropolitan city and the City of Pohang have enjoyed
prosperity as ―industrial cities,‖ and their local capacities show differences from other
industrial cities with regard to the current economic situation.
Ulsan Metropolitan City
Ulsan is located in the South Eastern part of the Korean peninsula; Ulsan
Metropolitan city has been leading Korea‘s main industries such as automobiles,
shipbuilding, and petrochemicals since the era of rapid economic development in 1970s.
55
The modern history of Ulsan Metropolitan city went along with the history of Korean
economic development. In 1997, Ulsan city obtained the status of ―Metropolitan city,‖
which is equivalent as the status of ―Province.‖
9
In 1995, Ulsan‘s population was
969,196; the total population increased to 1,112,799 in 2007. With a 1.1 million
population, Ulsan is responsible for 12.6% of the nation‘s total industrial output. The city
also has higher per capita labor productivity than any other city in the nation (annually
$35,000, which higher than Seoul‘s $18,000). The city‘s economic status derives from
specialized industrial clusters, which include the automobile industry as well as
petrochemicals, shipbuilding, and port service. The population of Ulsan city during the
last 10 years increased at an 8.8% annual rate. The provision of land development during
the period of 1997-2006 was designed to supply residential and industrial land parcels,
two major development pillars of urban growth in Ulsan. The spatial consequence of such
land development is, to some extent, a dispersed spatial pattern in which urban
development expands along with major transportation corridors. Mostly in recent years,
high-rise residential buildings have been built in the core of urban centers, which means
that the urban sprawl phenomenon is still unusual in Ulsan.
9
Statuses of cities in South Korea are categorized by population. Once the population
exceeds 500,000, the city can be a ―special city (Tukbul-si); if the population becomes
over one million, the city is promoted to a ― Metropolitan city‖ (Gwangyuk-si). As of
2009, South Korea had six Metropolitan cities, including Ulsan Metropolitan city.
56
Table 2.9 Population Change in Ulsan Metropolitan City
Year Population (person)
Population Density
(person) Area (km2)
1996 993,688 94.11 1055.5
1997 1,013,070 959.6 1055.73
1998 1,018,068 964.4 1055.73
1999 1,027,280 972.7 1056.08
2000 1,044,161 988.5 1056.3
2001 1,060,378 1003.8 1056.4
2002 1,070,277 1013.2 1056.38
2003 1,078,926 1021.1 1056.6
2004 1,087,958 1029.6 1056.7
2005 1,095,105 1035.9 1057.1
2006 1,102,988 1043.5 1057.1
Source: Ulsan Metropolitan City government data system 1996-2006
The performance of the local economy over the last 10 years has been relatively
strong even though the growth of the local economy fell sharply in the late 1990s partly
because of the Asian financial crisis. Table 2.9, below, shows Ulsan‘s current economic
conditions regarding the unemployment rate and economic participation labor force
change. The unemployment rate has been consistently lower, from a high point of 7.2%
to approximately 3% in 2006, despite the economic difficulties of early 2000. Rates of
labor in terms of actual economic participation has held steady at around 60% over time,
which indicates that Ulsan city maintained the economic basics that attracted the labor
force even during the economic crisis.
57
Table 2.10 Change of Unemployment Rate and Economic Participation Labor Force
Year
Unemployment
Rate %
Economic Participation Labor
Force %
1998 7.2 60.9
1999 6.2 58.8
2000 3.6 59.3
2001 2.9 59.7
2002 2.3 61.1
2003 3.1 60.8
2004 3.3 61.4
2005 3.5 60.7
2006 2.9 59.3
Source: Ulsan Metropolitan City government data system, Ulsan Statistical yearbooks
1999, 2003, 2007
The economic power of Ulsan Metropolitan City‘s automobile industry,
shipbuilding, and petrochemical industry is represented in Table 2.10, below. Ulsan city
contributes a large share of production in each industry. For example, the automobile
industry in Ulsan shared 26% of the national production of automobiles in Korea and
held 19% of employees nationwide. Shipbuilding in Ulsan also plays an important role in
shaping the structure of industry in Korea, which represents approximately 40% of
national production in the industry and 34% of employees.
58
Table 2.11 Production of Main Industry: Ulsan Metropolitan City (dollars), 2007
Automobile
Shipbuilding
Petrochemicals
Nation-
wide Ulsan
Nation-
wide Ulsan
Nation-
wide Ulsan
Production 97 billion
25billion
(25.7%) 33 billion
13 billion
(39%) 140 billion 51 billion (36.4%)
Value
Added Tax 32 billion
8 billion
(26.4%) 11 billion
4 billion
(40.7%) 38 billion 11 billion (29.3%)
Number of
Company 3,843 193 (5%) 1,064 132(12.4%) 4,177 184(4.4%)
Number of
Employees 253,491
480,
98(19%) 106,931 36,306(33.9%) 141,443 18,044(12.7%)
Source: Ulsan Metropolitan City
10
Table 2.11, above, also shows that the city‘s mainstream industries are not only
automobiles but also shipbuilding and petrochemicals. The share of local production in
shipbuilding and petrochemicals, compared to the national share, takes about 35% in total
term, whereas the local automobile industry maintained 9.3% of the annual increase rate
in amount of production. Such rapid growth in the local economy is mainly driven by a
few conglomerates, including Hyundai automobile, Hyundai Heavy Industry, and SK
Petrochemicals. Given the characteristics of the local economy, the local industrial policy
during the period of 1997-2006 was ―1) upgrading of mainstream industries (automobile,
shipbuilding, petrochemical); promotion of new regional strategic industries (precision
chemical, energy and environment, etc); and enhancement of sustainable industrial
environment.‖
11
10
http://english.ulsan.go.kr/Business/investment/environment/index.php
11
Ulsan Metropolitan City 10 Year: City Government White Paper
59
The city government plans local industry-related projects such as the auto-Valley Project,
and establishes public agencies including Ulsan Business Support Center, and the Ulsan
Industry Promotion Technopark. Attempts to transform the city after the 1991 Local
Autonomy Act can be witnessed in the Annual Report of City Policy Direction. For
example, Ulsan Metropolitan City‘s annual report of policy direction shows that the
direction of the main city policy has changed. In general, city policy has switched from
main administrative implementations to more direct involvement in order to prompt the
local economy. Also, the annual White Papers reveal the city‘s economic development
direction as consistently focused on local industry maintenance and restructuring.
However, the main focus of local economic development has not drastically changed. It
has focused more on enhancing ―leading industries,‖ rather than on undertaking major
economic transformation. An interesting distinction of Ulsan city is that environmental
concerns became a new major city focus and, in particular, the Taewha River
rejuvenation project has been one of the main environmental projects since 2003.
60
Table 2.12 Ulsan Metropolitan City Policies (2002-2007)
Year Administrative Activity Local Economy Environmental-Related Civil Service
2002 Reform of city administrative Regional/Local industry
enhancement
Satisfaction
Transportation service and
transportation network
development
Local welfare
level upgrade
2003 Cultural, tourism, and
educational condition upgrade
Regional industry
structure restructuring
City environment
upgrade
Welfare level
upgrade
Transportation service
Global city innovative
administration
2004 Cultural, tourism, Sports
environment upgrade
North East Asian
Industrial City
establishment
Harmony of
environment and
industry
Welfare level
upgrade
Transportation service upgrade Harmony of environment
and industry
Safe and livable city
Innovative administration
2005 Cultural and tourism Information industry
establishment
Environmental friendly
city
Welfare level
upgrade
Transportation service
Safe and beautiful city
2006 Innovative administration Regional competitiveness
enhancement
Clean Taewha River
task
Welfare level
upgrade
Self-help regional
development
Green city
Assist local leading
industries
2007 Transportation Assist local leading
industries
Green city Cultural
Taewha River task Welfare level
upgrade
Living
condition
upgrade
Source: Ulsan Metropolitan City Hall Annual Report of City Policy, 2002, 2003, 2004, 2005, 2006, 2007.
61
Pohang City
The history of the City of Pohang cannot be understood outside of the history of
POSCO (Pohang Steel Company), which was established in 1970. Even though Pohang
city was promoted in 1949, its actual development relied heavily on POSCO. Ever since
the industry established itself there, Pohang city has been known as ―POSCO city,‖
―Steel City,‖ or ―Miracle of Youngil-port,‖ and POSCO remains one of the biggest
employers in city. Pohang city was the fruit of a five-year economic development plan
started in 1967. In 1972 POSCO headquarters was transferred to Pohang city from Seoul.
Rapid population growth since 1970 is one of the drastic changes in the city. Before
POSCO, in 1968, the population in Pohang city was 72,000; in 1992 the total population
increased to 318,000, five times more. The population growth maintained until 2000,
though Pohang city has worried about the slight loss of population since 2001(POSCO
1992).
Table 2.13, below, shows the population and spatial change in Pohang city. In
1995— after the 1991 Local Autonomy Act— Pohang city expanded and became unified
Pohang city, which includes one city, two gus (subcity), 4 ups (villages), and 10 myuns
(subvillages) The percentage of the population change shows that there has been no
significant growth in the region since 1998.
62
Table 2.13 Population Change in Pohang City
Year Total % Change Population Density Area (km2)
1992 318,904 2.3 4,285 74.43
1993 322,621 1.2 4,335 74.43
1994 327,504 1.5 6,884 74.74
1995 510,867 n/a 454 1,126.46
1996 512,299 0.3 455 1,126.54
1997 512,953 0.1 455 1,126.60
1998 513,110 0 455 1,127.24
1999 514,523 0.3 456 1,127.24
2000 517,250 0.5 459 1,127.28
2001 516,576 -0.1 458 1,127.62
2002 513,424 -0.6 455 1,127.69
2003 510,414 -0.6 453 1,127.71
2004 508,937 -0.3 450 1,127.71
2005 509,148 0 450 1,127.71
2006 507,674 -0.2 448 1,127.74
Source: Pohang city government statistical yearbooks 1993, 1997, 2000, 2004, 2007
The economic structure of Pohang city changed drastically with the arrival of
POSCO. While the main industry before POSCO was fishing, Pohang city became one
of the biggest heavy industrial cities in South Korea next to Ulsan Metropolitan city.
Even though the percentage of employees in the service industry in Pohang city is the
highest, the manufacturing industry itself became the biggest employers among other
industries. In 2003 the manufacturing industry had 36,558 employees, which covered
around 24% of the total labor force in the city. At present, Pohang city is known as
Korea‘s largest steel production site and includes a complex of 244 companies, including
INI steel, Dongkuk Steel, and POSCO, and keeps expanding the steel-related industrial
63
complex with R&D institutes such as the Pohang Institute of Technology. Current
attempts in Pohang city to diversify the main industries are noticeable. Although they
would never abolish the title ―Steel City‖ due to its unique status (the number one
industrial city of North Gyeongsang Province), recently Pohang city has been
successfully promoting other heavy industry companies to build factories within the city.
The importance of Pohang city in North Gyeongsang Province explains Pohang‘s
economic status in the region. Not only did Pohang became one of the important
industrial cities during the rapid economic development period but also its regional
significance to the local economy has been recognized. Figure 2.4, below, shows the
Pohang manufacturing industrial status in North Gyeongsang Province between 1990 and
2001. Establishment and workers have continually increased while value added products
and final products have shown some fluctuation.
64
Figure 2.4 Percentage of Pohang Manufacturing Industry in North Gyeongsang Province
Source: KOSIS
POSCO and the steel industry-dominant industrial structure in Pohang can be
seen in the number of establishments and workers by industry. Between 1995 and 2006,
metal-related manufacturing workers reached 66% of total manufacturing workers, and
the number has not reduced significantly. During the economic crisis of 1997-8, the
percentage increased to 70%.
0
10
20
30
40
50
60
1990
1991
1992
1993
1994
1995
1996
1997
1998
2000
2001
establishment percent
workers
Products
Value added products
65
Table 2.14 City of Pohang: Number of Establishments and Workers by Industry
Year
Total Manufacturing %
Establishment Workers Establishment Workers
Metal-related
manufacturing
workers
Manufacturin
g workers
1995
29,419 151,070 1,984 39,679 67.59 26.27
1996
30,587 154,065 2,020 39,909 67.63 25.9
1997
31,344 158,352 2,029 37,489 68.93 23.67
1998
31,125 134,565 1,808 33,956 70.08 25.23
1999
32,671 129,391 1,915 28,304 70.23 21.87
2000
33,586 160,355 1,985 54,025 69.16 33.69
2001
33,424 152,515 2,109 35,950 70.17 23.57
2002
34,356 156,361 2,144 37,409 70.46 23.92
2003
34,328 153,370 2,050 36,558 68.97 23.84
2004
33,879 153,810 2,050 34,915 70.25 22.7
2005
34,262 157,555 2,183 37,952 68.42 24.09
2006
34,271 157,799 2,206 35,852 66.64 22.72
Source: Pohang Statistical Year Book (1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002,
2003, 2004, 2005, 2006).
Pohang city‘s annual White Papers reveal Pohang city‘s heavy dependence on
current major industries. Between 2005 and 2008, Pohang city‘s development directions
have focused on the expansion of industrial infrastructures, including Pohang Techno
Valley, Pohang Techno Park II, and Youngil Port development.
12
12
Pohang City Annual White Paper, 2005-2006, 2007-2008.
66
Comparison Between Ulsan and Pohang
Both Ulsan and Pohang earned the descriptor of industrial city during the rapid
economic development period that began in the 1970s. In the national industrial
development process, Ulsan and Pohang became a few of the well-known beneficiaries of
particular industries in the region. Both cities have been the site of those particular
industries, each one creating a different industrial structure through national economic
development plans. In the case of Ulsan, automobile, petrochemical, and shipbuilding
industries have been target industries not only in the national economy but also in the
local economy. On the contrary, POSCO in Pohang city dominated the economic status
for over three decades. Before privatization in 2000, POSCO was a public enterprise,
with the Korean government appointing the president of POSCO. Due to strong national
government support, POSCO and Pohang city received infrastructural and financial
support from the national government because heavy industry was the strategic industry
in 1970s and 1980s. This trend of governmental support changed due to the privatization
of POSCO and the decentralization movements. After the 1991 Local Autonomy Act,
local governments entered a new era of interlocal competition for national government
resources, including national projects like new industrial parks.
In their relationships to the national government, the cities show a slight
difference. Before the Local Autonomy Act, both cities remained under the command and
control of the national government. The role of local governments during this period had
been service deliverer, not decision-maker in local economic development. After the
1991 Local Autonomy Act, Ulsan showed its administrative capacity in local economic
67
development decisions. The Ulsan city government and the mayor actively sought the
national government‘s support and promoted more regional projects such as the new
regional industrial parks. The Ulsan city government‘s business support programs
provide not only local government subsidies but also other tax incentives for relocation
and the new establishment of businesses.
The Pohang city government‘s local development policies have concentrated on
support for POSCO and steel-related industries. After the privatization of POSCO,
Pohang city tried to create a new industrial structure by promoting high technology
industries such as Solar Energy. However, the main local development policies still focus
on the maintenance and expansion of the existing industry. Even with growing concerns
about a single dominant industry in the region, the overwhelming effect of POSCO in the
city of Pohang is hard to deny. The relationship between the national government and the
city of Pohang has been slightly changed since the 1991 Local Autonomy Act and the
privatization of POSCO. Before 1991, the national government supported POSCO
extensively based on its national economic development plans. After the 1991 Act, the
local government experienced the growing pressure of interlocal competition and
increasing worry that old industrial cities might lose the support of national government.
As a result, Pohang city relied more on POSCO‘s activity and thus has been sensitive to
POSCO‘s business decisions.
68
Table 2.15 Comparison Between Ulsan and Pohang
Ulsan Pohang
Kind of Industry Diverse (Automobile,
Chemical, Shipbuilding)
Single major industry
(POSCO)
Business ownership Mainly Private Public enterprise until 2000,
after 2000 became a private
company
Relationship with
National Government
Command and control Command and control
Mutual collaboration follow the national
development plans
Relationship with
business
Mutual collaboration Dependent on POSCO
Role of local
governments
Service deliver Service deliver
Mediator between national
government and business
More focusing on POSCO
2.4.Conclusion
The two sets of cities show similarities and differences in their history, economic
conditions, and political settings. Each city‘s history has a manufacturing concentration
period, though the longevity and condition of the manufacturing industries in each region
vary. Detroit and Pittsburgh have experienced a series of economic crises in relation to
the particular industries in their regions. In the case of Detroit, the automobile industry‘s
performance had a major impact on the local economy as well as on local communities.
Pittsburgh‘s steel industry provided the similar effect on the regional economy until the
early 1980s. After the collapse of the steel industry, Pittsburgh‘s economic and social
conditions experienced drastic changes, which led to the major differences between
Detroit and Pittsburgh. Economic restructuring process between two cities is also
69
noticeable. After steel‘s demise, Pittsburgh transformed into a more service-oriented
industry city, with a focus on healthcare and education. Institutional changes in the
Korean cases have been noticeable since the 1991 Local Autonomy Act, which gave
Korean cities more opportunities to determine their own economic development.
Each case in the two countries shares similar problems: concerns of population
decline, international and interregional competition, and sustaining local economic
prosperity in the era of globalization. However, variations exist as well, and those
variations are reflected in the local economic development pathways. The following
chapters discuss what has affected the different local economic developments in each city
at the international, national, and regional levels.
70
CHAPTER 3:
THE IMPACT OF THE INTERNATIONAL MARKET ON LOCALITIES
3.1.Introduction
The literature examining the impact of international market forces on local
economies is growing. The different relations between international market forces and
specific industries influence the pattern of local economic development (Buck, Gordon,
Harding, & Turok 2005; Sassen 2001; Savitch & Kanto 2002). Some researchers have
argued that the international market is closer than before due to the relative freedom of
capital and labor in the globalization era, whereas others have stressed the growing
significance of competition not only in the national economy but also in localities as
cities seek to maintain their economic position vis-a-vis other industrial or developing
nations and regions (OECD, 2005).
13
Due to the different consequences of international
market forces on local industries, local economic development patterns have adapted to
the change. Some cities adapt to change more flexibly than others, and this resilient
adaptation leads to different local economic development patterns. International
economic situations impact the local economy directly and indirectly.
13
OECD provided several reports examining the importance of regional competitiveness
for succeeding in the global market conditions. For more information about
competitiveness in regions, see Building competitive regions: Strategies and governance,
2005.
71
The degree of impact may differ depending on the industry, such as automobile industry
and steel industry. But the overall impact of the recent international economic situation
recently on the local economy shapes local economic development depending on
different industry conditions.
The pressure of globalization, the relatively free mobility of capital, and growing
economic markets such as China and other developing countries with lower labor costs
directly impact the domestic economic restructuring process. The combination of these
international economic changes have accelerated the economic transition from traditional
manufacturing to high value manufacturing and to an advanced service labeled a
―knowledge economy.‖ Not only developed states but also developing states that
concentrate on export-oriented industrialization have been deeply affected by the global
economic changes. With changes to the international economic environment, localities in
many countries have become aware of the growing power to influence national economic
policies as well as international competitiveness. Moreover, different international
market situations have brought about different local economic development paths. For
example, the steel industry in Pittsburgh completely shut down in 1980 and workers and
businesses did not face the gradual fade away effect. Local governments had to survive
with a new situation.
International economic situations impact local economies directly and indirectly.
The degree of impact may be different with different industries such as the automobile
industry and steel industry. But the recent international economic situation has shaped
local economic development through different industry conditions. Debates over
72
globalization and the chaos of the contemporary international market situation often point
to the demise of the traditional state and to the changing role of government. These
debates also raise questions about whether the once successful developmental state
remains an important actor in the face of the constantly changing international market
situation and international competition within and outside nation-state territories.
This chapter investigates how international market forces interact with localities
through local economic structures. International market forces intensify differences in
local industrial structures. The recent situation of local economies cannot be understood
without taking into consideration international market influences. Particular attention
must go to specific manufacturing industries such as automobile and steel, which had
sensitive reactions to the international market fluctuation as well as to global competition.
Simultaneously, the importance of these industries to the national economy has been
noticed despite the decline of the manufacturing industry in an advanced industrialized
country. With regard to the interconnectivity among international market forces, targeted
industry, and the local economy, investigating how these relations shape local economic
development is critical.
73
3.2. U.S. Cases: Different International Market Conditions and Timing Between
Auto Industry and Steel Industry
Detroit: Declining Automobile Industry in the International Market
When the Ford Motor Company was founded in 1903, southeastern Michigan,
especially near Detroit, became the national center of automobile production. With Ford,
and later General Motors Corporations and Chrysler Corporation, the Big Three enjoyed
the lion‘s share of the North American automobile market in 1980s. After the 1980s,
serious challenges from Japanese competitors drastically changed the geography of the
global automobile industry. Japanese competitors built plants inside the United States and
cornered roughly one-third of the vehicle sales in 1990.
Figure 3.1 World Motor Vehicle Production by Regions and Selected
Countries (%)
Source: OICA, various years
0
5
10
15
20
25
30
35
40
45
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Europe
America
United States of
America
Asia-Oceania
South Korea
74
The auto industry has been one of the important industries in the national
economy since the early twentieth century and has also been one of the beneficiaries
during economic crisis. One of the main reasons why the automobile industry did not
face a similar fate to the steel industry is due to the structure of automobile and related
industries. Even before the ―lean production method‖ was introduced in 1980s, the
automobile industry consisted of a large number of very small companies as a loose
network organization. After Ford‘s Model-t method was introduced, relationships among
factories became vertically integrated and centralized. With Ford‘s model, the company
possessed a modern, bureaucratic, rational, vertically integrated, and centrally organized
structure (Wibbelink & Heng, 2000). Adding General Motors‘ more decentralized
organizational structure, the automobile industry in the United States employed a
significant number of workers in the manufacturing industry category over time. In 2005,
1.1 million workers were employed in automobile manufacturing, receiving, on average,
a wage that was 11% higher than the U.S. average.
Motor vehicle parts manufacturing, the largest industry group, accounted for
693,120 workers, or 62% of the industry‘s workforce in 2005. The motor vehicle
manufacturing industry had 256,700 workers, and motor vehicle body and trailer
manufacturing employed the fewest workers in automobile manufacturing at 15% of the
industry‘s workforce (Holt, 2005). As a result, the auto industry did not face the same
destiny as the steel industry.
75
Even after the second oil crisis, the American auto industry‘s importance did not
diminish. Even though international market competition intensified over the decades, the
American Auto industry did not perish— even though Detroit‘s Big Three accounted for
45% of the market in the U.S. in 2009 (Lombardi & Lavelle, 2009).
Though the international market structure has been shaped by cheaper labor and
cheaper land as well as by technological developments, such changes have not spelled the
end of the auto industry in the United States. The Big Three continued to receive Federal
financial support as well as state assistance to overcome financial crisis. Even though the
Big Three‘s factories had been escaping from the central city over time, the auto industry
still dominates Detroit‘s economy. The impact of international market fluctuation goes
directly to where the factories are located. Detroit offers a clear example of how
international market forces influence a locality. Serious lay-offs from the gradual decline
of the Big Three led to the city‘s economic decline as well. Chicago Federal Bank‘s auto
industry restructuring led to a 770% drop in Michigan‘s auto-related employment since
1989, which the U.S. has endured a 50% decline of the auto-related employment. The Big
Three, in the process of downsizing, directly impacted the auto-dependent regions.
Growing unemployment rates led to pressing demands from the community on city hall
to solve more burdens as well as to address the lack of tax collections. Job loss on this
scale can redirect local economic development because of growing demands on social
welfare.
76
Pittsburgh: Complete Collapse in Steel Industry in the International Market
Steel and other materials play an essential role in economic development. During
the early stages of national development, the consumption of steel was relatively high,
with the construction of infrastructure such as railroads, highways, dams, bridges, and
buildings. The United States went through this phase during the late nineteenth and early
twentieth century as the manufacturing sector became an important engine for economic
growth. This trend has occurred in developing countries as well. South Korea and China,
as well as other developing countries, demonstrate that a nation‘s wealth can be tied to
steel and to a strong manufacturing sector. Steel consumption has been growing over
time, but due to global competition over production costs (including labor), the American
steel industry started to lose its advantage to developing countries.
The North American steel industry is an important source of employment and tax
revenue for local and regional economies. In the U.S., for every one job formed in the
steel industry, seven additional jobs are created in other economic sectors, such as raw
materials, transportation, computers, and related technical services (Considine, American
Steel). Between 1950 and 1980, the steel industry‘s geographical distribution changed
little. North America, the USSR, and Western Europe have held the major share of the
world‘s steel output since the 1950s; since late 1960s, the Japanese steel industry
emerged as a latecomer to the international steel industry, and in 1980 became the
leading single producer in the world (De Medeiros, 2006).
77
Unlike the gradual decline of the automobile industry, the steel industry in the
United States experienced a sudden collapse. Particularly in Pittsburgh, U.S. Steel‘s
complete ruin brought tremendous local changes, including economic and social
restructuring. The steel industry then became an intensively competitive global industry.
The average number of employees in U.S. Steel has shown significant shrinking over
time. In 1980, the average number of employees in U.S. Steel was 149,172, compared to
24,664 in 1990 and 20,267 in 1998.
14
U.S. Steel‘s collapse did not provide rejuvenation
of steel industry after then. The characteristics of the steel industry are significantly
different from those of the automobile industry. The steel industry is often referred to as a
―key‖ or ―strategic‖ industry because of its importance to development and because of
the particulars of its production process. Both steel and its majority input, iron ore, are
produced in a highly capital-intensive manner. Their production involves long lead times
and continuous processes. The resultant rigidity in steel supply, coupled with the highly
cyclical nature of demand for steel, mean that certain key decisions in the industry are
made through coordinated, administrative processes as opposed to pure market forces
(Allwood, 2009).
14
See Warren (2001), Table 23.1
78
At the same time, the local economy that depended heavily on the single industry
tried to reshape itself completely. The collapse of the single dominant industry brought
different opportunities to localities especially to business leaders and county leaders as
well as city hall. After the shutdown of the steel industry, Pittsburgh‘s local economic
structure transformed into a diversified industrial structure including advanced high
technology and service industry such as health care. In the case of Pittsburgh,
international market conditions and competitions functioned as push factors for local
business elites and business colleagues. However, the difference between the U.S.
automobile industry and U.S. steel industry is that the former outsourced its auto part
factories and final assembly plants overseas, whereas the latter maintained a relatively
active cluster within the region after its collapse. After steel collapsed, Pittsburgh‘s local
industry transformed from a single dominant industry to a diversified industrial structure
with a growing number of major headquarters in Pittsburgh regions including the city of
Pittsburgh. At least five headquarters of Fortune 500 Corporations are located in the city
of Pittsburgh, including U.S. Steel, PNC Financial, and H.J. Heinz Company.
Headquarters located in the city of Pittsburgh vary from a steel-related company and
financial corporations to advanced manufacturing industries (Pittsburgh Regional
Alliance).
79
3.3. Korean Cases: Late-Comer’s Advantage in the International Market
Over four decades, the Korean economy has been a successful example of late
industrializing countries based on the relative advantages of cheap labor and international
market incentives. The Korean economy‘s upgrading effort over the last two decades has
lead to gradual restructuring of the Korean economy. However, the importance of the
automobile industry and the steel industry did not shrink significantly despite serious
international competition and the international financial crisis in 1997-98. Even though
the Korean automobile and steel industry has been sensitive to international market
changes, locality‘s economic destination is not the same as that of Detroit and Pittsburgh.
Even after the 1997 Asian financial crisis, Ulsan and Pohang showed relative resilience
and rebounded from the crisis relatively well compared to other cities‘ situations. One of
the possible reasons why Ulsan and Pohang did not have the same experiences as Detroit
and Pittsburgh once their main industry had been severely attacked by international
competition can perhaps be explained by their degree of involvement in the international
market. The Korean automobile and steel industries, considered ―late-comers‖ to the
international market, were backed by national government‘s strong support. The
automobile and steel industries in Korea have been considered ―main industries,‖ so that
the national government paid close attention to their activity.
80
Ulsan
Ulsan has been a center of heavy industry in the Korean economy, and its auto
industry, in particular, has been a targeted industry in the national economic development
plan. Among the manufacturing industries in Ulsan, no single dominant industry existed
in the region. Rather, four heavy manufacturing industries coexisted and became the
backbone of the local and national economies. The Ulsan economy has been a
beneficiary of rapid international market changes. Despite being a late-comer to the auto
industry and other heavy industries, Korean manufacturing industries has shown
significant development over the past three decades.
As a center of the manufacturing industry in Korea, Ulsan has been significantly
influenced by international market conditions. Since Ulsan‘s local economy has not been
dominated by a single industry, when the economic crisis occurred in 1997-8, the impact
was relatively light compared to other East Asian cities. However, the international
market forces clearly alarmed the Ulsan economy and a new city government emerged
after the economic crisis. Still, Ulsan city‘s economic development patterns did not
change significantly in response to international market forces because it had a relatively
loose involvement in the international market.
81
For example, even though the city declared the need for high technology and service
industries to boost the local economy, it did not comprehend the relevance of the service
industry to its region and had the tendency to promote industry that already heavily
related to its existing main industry. Ulsan‘s future economic development plan mainly
revolves around three main industries even though the city‘s annual White Papers
declared that the future focus would be on the service industry. Its future service industry
mainly focused on ―tourism‖ (Ulsan Metropolitan City White Paper).
Pohang
The international steel industry has become more competitive recently. During the
period of the 1960s to late 1980s, the steel market was dominated by OECD countries.
But the emergence of developing countries like China, India, and South Korea led to their
taking a significant market share from OECD countries. The global steel industry is
highly cyclical, very competitive, and still fragmented in terms of market share. Table
3.1, below, shows the current market share of steel industry, indicating that there is no
single dominant company in the international steel industry, giving companies from
developing countries more room to conduct business.
POSCO has been a single dominant company and the steel industry was the one
and only industry in Pohang, a phenomenon that did not change significantly until
recently— despite attempts to transform the local economic structure after
decentralization in 1991. Even in 2000, after POSCO‘s privatization, Pohang‘s economy
heavily depended on the steel industry and the international steel market has shown favor
82
to a late-comer that has provided lower priced products. Since POSCO entered the
international market after U.S. Steel‘s demise, POSCO and the Korean steel industry
received overall positive effects from international market conditions. Simultaneously,
since the economic status of Pohang as POSCO city has not changed significantly, the
national government‘s constant support became one of the major resources for growth in
the industry.
As a steel industry-concentrated city, Pohang has received significant government
support since the beginning of the city. Through the national industrial complex,
Pohang‘s steel industry had been protected by the national government as a part of
national economic development plans. Starting in 1975, the Pohang National Industrial
Complex strongly supported the steel industry. Based on the 1970 steel industry
Development Plan Act and the 1973 Heavy Industry Development Plan, Pohang became
a center for Korean steel industry and Pohang Iron and Steel Company was established
through the support of the national government. Since then, the Korean national
government has paid close attention to the development of the steel industry and has
provided diverse direct and indirect support. The government provided POSCO with
financial assistance as well as infrastructure subsidies (railroad line, highways, port
facilities, and electricity) (Rodrik, 1995). The situation of steel production between the
two countries is different from the status of the automobile industry. Competition
between a once leading steel producer, U.S. Steel and Bethlehem, and the relatively late
entry, POSCO, led to POSCO‘s overthrow in 1989. Before 1989, the U.S.‘s dominant
status in the world steel production had been difficult to challenge.
83
Table 3.1 indicates the dominance of the American steel industry and the market
share of the Korean steel industry in the world up until 1990. Between 1980 and 1990,
after the USSR, the United States maintained the second largest market share in the
international steel industry, led by Japan. These market shares were led by U.S. Steel and
Bethlehem Steel, which covered more than 35% of the total steel production in the world
when they were combined between 1970 and 1981(World Steel Organization). On the
contrary, compared to the U.S., the Korean market share was not significant until 1990.
Between 1980 and 1990, South Korea had less than 3% of the total steel production in the
world. As a result, the decline of the U.S. steel industry impacted the Korean steel
industry positively.
Table 3.1 Percentage of Steel Production in Selected Countries, 1980-1990
Country 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Belgium 2 2 2 2 2 1 1 1 1 1 1
France 3 3 3 3 3 3 3 2 2 2 2
Germany 6 6 6 5 6 6 5 5 5 5 5
Italy 4 4 4 3 3 3 3 3 3 3 3
Spain 2 2 2 2 2 2 2 2 2 2 2
UK 2 2 2 2 2 2 2 2 2 2 2
USSR 21 21 23 23 22 22 22 22 21 20 20
Canada 2 2 2 2 2 2 2 2 2 2 2
United States 14 16 10 12 12 11 10 11 12 11 12
Brazil 2 2 2 2 3 3 3 3 3 3 3
China 5 5 6 6 6 7 7 8 8 8 9
Japan 16 14 15 15 15 15 14 13 14 14 14
South Korea 1 2 2 2 2 2 2 2 2 3 3
Total 100 100 100 100 100 100 100 100 100 100 100
Source: World Steel Organization
84
The performance of individual steel companies in each country offers a better
picture for understanding how the company affected the local economy. Before the steel
industry‘s collapse, Pittsburgh‘s economy heavily relied on the steel industry. U.S. Steel
was one of the biggest employers in the region. However, due to intensified
international competition and tariff issues in the 1980s, U.S. Steel collapsed and
ultimately Pittsburgh city experienced a massive local economic crisis. On the contrary,
Pohang city enjoyed prosperity from POSCO‘s strong performance as well as from
immense national government support. POSCO‘s improved performance was influenced
by the demise of the American steel industry, including the decline of the U.S. Steel
Company. After 2000, the privatization of POSCO raised serious questions about
having a single dominant industry structure in the locality. Due to the important
economic status of POSCO the national economy as well as the local economy still paid
close attention to its performance. However, after privatizing, POSCO concentrated
more on global expansion than on local expansion. In Pittsburgh, a diversified industrial
structure has emerged as local industrial restructuring fills the ―vacuum‖ left by the
demise of the steel industry.
85
Figure 3.2 Steel Production in U.S. and South Korea Companies, 1970-2007
Source: World Steel Organization (IISI): The Largest steel-producing companies
between 1970 and 2007.
Figure 3.3 shows the different market share of motor vehicle production in both
countries. Since 1961, the United States lost its dominant market share to international
market competition, specifically Japanese companies. While the decline of the United
States market shares continued, South Korea‘s market share has not changed
significantly since 1991. Between 1991 and 2002, South Korea shared less than 5% of
total production in the world. While the U.S. automobile companies suffered from
severe international competition and lost their once-dominant status, South Korea— like
any other late-comer— still struggles to obtain more of a market share of automobile
production. Simultaneously, South Korea‘s automobile industry took advantage of the
0
5
10
15
20
25
30
35
40
1970
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
U.S. Steel
Bethlehem
Pohang Iron and Steel
86
U.S. automobile industry‘s suffering by attracting different consumers. Despite its small
percentage of the international automobile market, South Korea‘s domestic automobile
industry has been rapidly growing and Ulsan, home to one of the biggest automobile
production companies, Hyundai Automobile Company, shows significant growth that
closely corresponds to the growing demand for domestic automobiles. That Detroit
suffered from substantial job losses with the Big Three‘s continuing bad performance is
well known. However, in the case of Ulsan, serious economic setback such as massive
job loss has not occurred. The Korean automobile industry hardly reached the
international status that the Big Three enjoyed during 1960s and 1980s, and it is still
somewhat difficult to predict whether the Korean automobile industry will overthrow
the American automobile industry. Even though the Korean automobile industry
produces close to 5% of the total production in the world, fluctuation in the international
market and heavy competition from other companies prevent the Korean automobile
industry from increasing its market share.
87
Figure 3.3 Percent of Motor Vehicle Production in the World: U.S. and South
Korea
Source: Ward‘s Motor Vehicle Facts & Figures 2003, Table 1-22: World Motor
Vehicle Production, Selected Countries (Thousands)
Ulsan‘s other crucial industry is shipbuilding, which constitutes close to 30% of
the total economy. The production of shipbuilding in the world between 1990 and 2009
shows the Korean shipbuilding industry performing better than leading countries. Since
1999, Korea‘s shipbuilding production capacity exceeded that of Japan, a trend that has
been maintained. Ulsan‘s shipbuilding capacity has gradually increased except during
the period of economic crisis between 1997-1998. In addition to shipbuilding, Ulsan‘s
main industry is petrochemicals, which represent close to 38% of the total petrochemical
production in the nation.
0
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South Korea
88
Figure 3.4 Production of Shipbuilding Industry of Selected Countries, 1990-2009
Source: Lloyd‘s World Shipbuilding Statistics (cited from KOSHIPA
15
)
CESA; Community of European Shipyards Associations
Even though Ulsan and Pohang city did not engage in the international market
early on, their current engagement in the international market indicates that they may
experience significant fluctuation. Due to their local industrial structures, both cities have
experienced different impacts from the international market. Ulsan‘s diversified
manufacturing industrial structure allows it flexibility and balance in facing international
market fluctuation. Pohang, on the contrary, is dominated by a single industry— even
more specifically, by one company.
15
http://www.koshipa.or.kr/eng/koshipa/koshipa3/statistics_world.html
0
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Others
89
Due to institutional changes such as decentralization and privatization, the relationship
between Pohang city and POSCO has altered and sometimes tension between them has
arisen. However, for Pohang, the influence of one dominant company not only in the
national economy but also in the local economy is too overwhelming to seek local
industrial restructuring.
3.4. Conclusion
The recent status of local economies cannot be understood without taking into
consideration international market influences. Particular attention must also go to specific
manufacturing industries such as the automobile and steel industries. These industries
have had sensitive reactions to international market fluctuations as well as to global
competitiveness. Simultaneously, the importance of these industries to national economy
has been noted in spite of declines in the manufacturing industry in advanced
industrialized countries. The interconnectivity among international market forces,
targeted industries, and local economies is important to an investigation of local
economic development.
Different industries impact the local economy differently through international
market competition. The degree of impact of the automobile industry in Detroit and the
steel industry in Pittsburgh led to different paths of local economic development. The
steel industry in Pittsburgh completely shut down during the 1980s and workers and
businesses did not have a gradual fade-away effect. Very abruptly, local government had
to survive with the new situation. The automobile industry experienced a serious decline
90
over two decades but chose to reorganize and restructure in order to keep the business
instead of completely shutting down. However, international market competition did not
favor the American automobile industry and, as a result, the decline of the automobile
industry in Detroit seriously impacted the local economy. Detroit and Pittsburgh
experienced a more direct impact of international economic change as compared to Ulsan
and Pohang, which benefitted from a late-comer‘s advantage. With a less significant
market share, Ulsan‘s automobile industry and Pohang‘s steel industry maintained stable
performance in spite of international market conditions.
With regard to the relationship between international market forces and the local
economy, the national government‘s involvement must also be taken into consideration.
International market force functions differently in different national contexts. While
Detroit and Pittsburgh were affected by international economic change more directly,
Ulsan and Pohang received the national governments‘ support and protection. The
national government filtered the impact of international economic change through its
national economic plan. Unitary systems have the ability to buffer the impact of
international change on locality with diverse national economic development plans.
Through businesses international market forces affect localities, but in the case of Korea,
the relationship between international economic change and the sudden economic change
of localities is somewhat vague.
Differences between the U.S. and Korean cases can be summarized in three
aspects. The first aspect is the international market involvedness in each case. The
international market‘s share of Detroit‘s automobile industry, despite the current decline,
91
played an important role in shaping the local economy. The Big Three‘s performance has
been an indicator of Detroit city‘s economic performance. Pittsburgh‘s steel industry
showed a similar picture when the steel industry collapsed. Due to steel‘s direct relevance
to Pittsburgh‘s economic structure, the decline of the American steel industry in the
international market directly impacted the local economy.
The second aspect is the different political setting in each case. A federal system
has no national economic development plan, and it is relatively difficult to protect
particular industries from international market pressures. As a result, even though the
federal government provided support for the automobile and steel industries, it was not
enough to compensate for the extraordinary losses. In this case, the international market
directly influenced the local economy through industry. On the contrary, in the case of a
unitary system such as Korea‘s, the national government‘s protection of the industry is
partially the result of national economic development plans. Clearly the national
government considered particular industries to be the ―backbone‖ of the national
economy, and continued to offer financial and infrastructural support through national
economic development plans. As a result, cities and regions where those particular
industries are located received significant support including subsidies and local transfer.
Type of industry also must be considered in order to understand economic impact.
For example, certain types of service industry may not relocate due to their heavy
involvement with the existing manufacturing industry. Auto parts factories are able to
move to other sites relatively easy due to the nature of their workers. An assembly
worker‘s job qualifications may not require higher education and skills, however, steel
92
factories require experienced workers. At the same time, the proximity of natural
resources for steel products serves as a hindrance to relocating a factory. In Korea, the
manufacturing industry‘s relocation is a national issue as well as local one due to the
legacy of the industrial establishment. As a result, it is hard for the company to relocate
factories, and the recent trend is in building new factories (mostly simple assembly line,
less impactful factories).
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CHAPTER 4:
INSTITUTIONAL ENVIRONMENT IN TWO COUNTRIES
4.1.Introduction
Today cities show similar patterns: they seek to develop their economies, to
improve quality of life, and to increase local accountability and efficiency. Regardless of
national context, cities throughout the world share a number of key elements such as
population growth, unemployment rates, fluctuation of economic growth, and
environmental challenges. However, that they share the same difficulties over time does
not answer why each city shows a different response to external and internal pressures.
One key agent in local economic development pathways is the territorial state.
The state in its various institutional and spatial forms exerts critical influence on the
processes and governance of local economic development (Brenner 2003; Peck & Yeung,
2003). As Hugh Heclo has mentioned, the government‘s policy-making process is
―political, not because all policy is a by-product of power and conflict but because some
men have undertaken to act in the name of others‖ (Evans, 1985, p. 11).
Different national political systems influence local economic development. In
unitary systems, the relationship between the central government and local government is
relatively simple top-down, command, and control. Once the central government decides
the policy, the local government must deliver and implement it. On the contrary, in
federal system, cities have much more autonomy, though they still rely on federal and
state governments in several respects. Even with the ―new‖ federalism from the 1970s,
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federal aid and support for cities have played a considerable role in shaping local
economies. In order to maintain and improve their ―growth,‖ cities choose diverse local
economic development paths regardless of their political settings. It implies that
intergovernmental frameworks are considered not only constraints (for example, they
limit the autonomy of cities to engage in domestic and international activities), but also
resources and opportunities (for example, they allow and support cities‘ activities)
(Kubler & Piliutyte, 2007, p. 358).
How to develop and what to develop are different issues and how to allocate
limited resources can test the local capacity as well. If it already has a history of dealing
with social tension and business relations, a city tends to choose a more flexible
economic development path in response to internal and external change. If a city does
not show a governing capacity particularly in times of economic crisis, its‘ local
economic development pathways may be determined by diverse internal and external
forces. In order to understand local capacity, the first step is to parse out the influence of
a nation‘s institutional environment on localities.
This chapter reviews intergovernmental relationships in two different political
settings and how individual cities responded within their respective systems. The second
part of the chapter will discuss the ideological differences between the two countries and
how these differences influence local economic development through cities. This chapter
argues that different nation-state structures construct different local capacities not only in
the growth of the service center but also in manufacturing because the differences of
national state structure— such as a federal and unitary system—are heavily embedded in
95
a locality. For example, in a federal system, natural competition among localities is more
freely exercised. Conversely, a supralocal influence on certain types of urban
development is obviously exerted in a unitary system.
4.2.Difference of Institutional Environment: Federal System vs. Unitary System
Federalism is a constitutional or legal concept that focuses on how powers are
distributed among different levels of government. Old style federalism (simply
federalism) emphasizes the Supreme Court‘s interpretation of the constitution as to which
powers belong at which level of government. Federalism primarily implies a federal-
state relationship, as cities are not mentioned in the constitution. Under the constitution,
the federal government has specific limited powers and most government functions are
left to the state. Therefore, federal and state governments have separate functions and
powers; after new federalism was introduced, the federal government shifted certain
responsibilities to states. The ―new federalism‖ refers to the changing relationship
between national and state governments that shapes its new responsibilities within the
federal system. In particular, devolution is one of the main concepts of the new
federalism. Devolution refers to passing policy responsibilities from the federal
government to state and local governments. This process leads to reduced grants-in-aid
from the federal government and to increased flexibility for states based on the belief that
these actions enhance the responsiveness and efficiency of the federal system (Watson &
Gold, 1997). With federalism, subnational governments tend to gain more decision-
making autonomy than in other political systems. According to Tiebout (1956), better
96
governance exists in the federalist system since it fosters growing competition among a
number of subnational governments, which stimulates a free market and provides exit
options to unsatisfied constituents. Through competition among subnational
governments, politicians and bureaucrats are persuaded to make better policy decisions in
order to attract and retain constituents (Brennan & Buchanan 1980; Buchanan 1995;
Weingast, 1997). In particular, from a fiscal-federalism perspective, a constitutionally
guaranteed separation between national and subnational governments provides incentives
that promote better public interest. Oates (1999, pp. 1121-2) states the principle of
decentralization with the assumption that:
Decentralized levels of government have their raison d‘être in the provision of
goods and services whose consumption is limited to their own jurisdiction. By
tailoring outputs of such goods and services to the particular preferences and
circumstances of their constituencies, decentralized provision increases economic
welfare above that which results from the more uniform levels of such services
that are likely under national provision. (as cited in Gerring, Thacker, & Moreno,
2006, pp. 6-7)
Regarding accountability, a federal system tends to create more localistic politics.
Within a federal system, decentralized political power and devolved responsibilities
require closer connections between government units and constituents. Politicians‘
awareness of local affairs can be intensified in a federal system. Accountability is
enhanced if the relationship between government and citizens is rooted at the local level.
A unitary system is a political system in which the national government is
sovereign relative to its territorial units (Gerring & Thacker, 2004). A unitary system has
a strong role for national government in local affairs. In a unitary system, the
intergovernmental relationship between the central and local governments is relatively
97
simple. The central government possesses significant authority and decision-making
power, centralizing political power and reducing the number of potential veto points.
16
Generally, local governing bodies simply serve as administrative arms of the central
government. A centralized political system has clearer lines of authority, and hence
establishes greater accountability. As a unitary system, South Korea is known as having
strong central government and weak local government. Limited decision-making power
in local governments has been permitted by the central government, and local
governments cannot conflict with national policy. Unlike in a federal system, no
reserved powers existed for state/provinces and localities before the decentralization
process began in 1991. This formal structure changed in 1991 with the Local Autonomy
Act in Korea. Local autonomy in South Korea is largely a product of the democratic
movement during the 1980s (Park, 2006). In 1995, South Korea conducted direct local
elections for governor, mayoral, and local council positions. In addition, local
governments started to open their eyes and consider local interests, competition with
neighboring cities, and resistance to the national government in terms of national policies
and national projects. As a result, local governments competed with each other to obtain
the central government support that once was taken for granted by certain regions.
16
The concept of veto power is cited in Gerring and Thacker‘s 2004 article. The authors
use the term as a way of representing the power of individuals and groups to influence
governmental actions, even if they cannot put an end to such action. See footnote 58 p.
313 .
98
As Goldsmith (1995) has argued, local government‘s political status within a
national political system is a significant source of local autonomy. American federalism
guarantees a relatively strong local autonomy compared to a unitary system. However,
certain regions that have suffered from the decline of their inner cities have received
diverse federal support even in the American federal system. At the same time, in the
unitary system in Korea, an embedded ―developmental state‖ legacy plays an active role
even after the 1991 Local Autonomy Act was enacted.
Market-Centered vs. State-Centered Cities
In the United States, a multitier governmental system gives more flexibility to
local governance to deal with its local economy because cities depend less on central
state supervision. This independence can be enhanced by the characteristics of a
particular industry. American cases show that economic development in localities can be
varied based on different patterns of growth. Urban regeneration, gentrification, urban
renewal, and urban renaissance are some of the terms to identify the economic
development patterns in the U.S. cases under study here. Economic development in the
Korean cases refers more to physical expansion such as development of the national and
local industrial complex and expansion of new factory sites, not downtown
redevelopment. Urban redevelopment is not a proper way to describe the patterns of local
economic development in Korea. Local growth also means how much they are able to
maintain the existing enterprises and how much they promote new industry in
cooperation with business.
99
In Korea, after 1991, cities began to compete with each other to obtain central
government support for the reallocation and promotion of the industrial complex. Fewer
cases were national government-appointed projects and more were decided through
national bidding and competition. The door was open to cities to apply to national
projects.
Ideological differences between the two countries are also an influential factor.
South Korea has been known as one of the successful ―developmental states‖ in East
Asian countries including Japan, Taiwan, Hong Kong, and Singapore. In particular,
theoretical debates around the developmental state in Japan and Korea have highlighted
the strength of the state in directing and intervening in the state‘s economic development.
A strong interventionist central government led by elite bureaucrats is one of the critical
factors for the state to set consistent, long-term industrial and economic policy (Amsden,
1989; Evans, 1995; Johnson, 1982; Woo-Cumings, 1999). As many scholars have
pointed out, ―economy first, redistribution later‖ policies under the developmental state
established close cooperation among politicians, bureaucrats, and the business sectors in
making industrial and economic policies, and this close cooperation set an effective
strategy for advancing the state‘s economic development objectives. Under this catch
phrase, some cities enjoyed the privilege of significant support from the national
government, which was seeking to establish industrial infrastructures for targeted
industries. Under the ―developmental state,‖ locality did not play a significant role in
decisions around local economic development.
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The development of the city and prosperity of the city were so-called side effects
of economic development that focused on target industries in Korea. Discussions of
cities in a developmental state are rare and cities themselves have not been a main subject
of study because of the strong central government. In Korea, cities in developmental
state stages did not have much room to decide their own destinies, especially in terms of
local economic development. However, this trend transformed since the 1991 Local
Autonomy Act was enacted. Levels of local autonomy were elevated and national
projects became more about political bargaining between national and local governments.
Growing interlocal competitions in ―innovative city decision,‖ ―Industrial cluster
decision,‖ and siting of national projects like the hazardous waste disposal plant have
become more political decisions than economic concerns. The decentralization process
in Korea added a number of players to political negotiation, and the role of new players
such as local governments and local politicians became more significant in influencing
local economic development pathways. The presence of an active and relatively
powerful developmental state (Applebaum & Henderson, 1992; Evans 1995; Hill & Kim,
2000; Saito, 2003; Woo-Cumings, 1999) remains an unresolved issue in Korea‘s
postdecentralization era.
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In the case of the neoliberal city in the U.S., we can assume a more autonomous
role in local economic development. Peck et al., have pointed out the importance of
cities in neoliberalism. In the past two decades, cities have received attention as being
central to the reproduction, mutation, and continual reconstitution of neoliberalism itself.
Specifically, American cities have become incubators for many of the major political and
ideological strategies to exercise neoliberalism (Peck, Brenner, & Theodore, 2009).
Particular characteristics of neoliberalism include minimal intervention of
government and intervention only in very specific circumstances. Neoliberal policies can
be found in several federal programs such as reducing public housing, redistributive
welfare programs, U.S. Department of Housing and Urban Development, and federal
government redistribution to state and cities. Because of the reduction of national
intervention in housing, local infrastructure, welfare, and the like, localities are forced
either to finance these concerns themselves or to abandon them entirely. This process has
accelerated in the globalization era. Globalization and international market forces
influence the nation state to restructure urban policies from redistributive to competitive
policies; part of the process has been the aggregate effect of ―hollowing out‖ the nation-
state, decreasing its role as an institutional buffer between localities and the global
economy (Jessop, 2002). This phenomenon occurred after 1972 in the urban crisis as well.
102
Harvey (1989) has argued that ever since President Nixon declared an end to the urban
crisis in 1972, the federal government dramatically reduced subsidies to cities. As a result,
many U.S. cities have become less interested in managing residential services and more
focused on developmental policies that might stimulate local economic development.
This process intensified interlocal competition for federal aid in the United States.
U.S. Cities in a Federalist System
Different national political systems influence local economic development
patterns. In the United States, the federal system has constraint the possibility of national
economic development policies practiced in Europe and Asia. (Markusn, 1994).
Subnational governments have more freedom to enact their own economic decisions; in
particular, state governments wield powerful influence over city governments. American
cities do not have guaranteed constitutional power; they are not de jure but de facto
entities because they are ultimately creatures of the state. Cities in the American federal
system exercise limited power that is guaranteed by the state, and the relationship among
the state, cities, and the federal government changed after New Federalism. After New
Federalism, the federal government tried to bypass the state and directly connect to local
entities to reduce the budget.
The study of the role of the federal government in local economic development
has shown different results. Dominant research shows the negative or minimal impact of
the federal government on local economic development in the American federal system.
On the contrary, scholars who study the Keynesian welfare state argue that national
103
structures inherited from the past significantly affect the degree and form of devolution of
powers and responsibilities, though the nature and extent of state territorial organization
has been changed due to the external and internal impacts. Furthermore, due to the
national structure, the Keynesian welfare state reinforced national or federal governments
at the expense of subnational governments and authorities (Brenner 2004; Donahue 1997;
Rodriguez-Pose & Gill, 2003). At the same time, various authors have argued that
intergovernmental relations not only limit cities‘ autonomy, but also include
opportunities by which cities can expand their capacity to act (Hesse & Sharpe, 1991;
Page, 1991; Page & Goldsmith, 1987). The U.S. federal government has played a
relatively active role in urban economy, at least during the Clinton Administration.
Federal and State Governments in the U.S.
Study of the role of the federal government in local economic development has
shown its negative or minimal impact. Current research recommends a more active role
by the federal government in local economic development as well as in the national
economy, particularly during times of economic difficulty. Historically, federal
development efforts have tried to increase overall national productivity and to help
economically distressed and poor communities gain a share of the country‘s general
prosperity.
17
To accomplish these efforts, the federal government has built and sustained
17
It is not relevant to evaluate in here whether the previous federal economic policy has
been effective or not since this research posits that even in the federal system, the
government played a role on local economic development. For more debates regarding
104
a variety of organizations involved in economic development at many levels of society.
Most federal economic programs provide support through state and local economic
development organizations. One federal program is the Urban Development Action
Grant (UDAG) program. The UDAG program provides eligible cities great latitude to
craft creative responses to perceived needs (Dreussi & Leahy, 2000). As an off-shoot of
the Carter administration‘s New Federalism, UDAG originated in the Housing and
Community Development Act of 1977, which commissioned the HUD Secretary to target
UDAG awards for ―severely distressed cities and urban counties to help alleviate physical
and economic deterioration as evidenced by excessive housing abandonment or
deterioration, population outmigration or a stagnating or declining tax base‖ (HUD 1980).
Federal government‘s effort to rejuvenate urban areas continued into the Clinton
administration. In 1995, the Clinton administration announced a national urban policy
agenda, encouraging private investment in cities and community empowerment
connected with entrepreneurial public entities, private actors, and a growing network of
community-based corporations and organizations (The Clinton Administration‘s National
Urban Policy Report, 1995).
One particular effort in the urban policy of the Clinton administration is the
Empowerment Zone (EZ) and Enterprise Communities program (EC). In 1995, Urban
Empowerment Zones (EZs) received $100 million each in flexible block grant funding
that could be applied to a broad range of activities, including social services and physical
the effectiveness of federal intervention, see Thornburgh (1998) and Straub and Robinson
(2000).
105
improvements. Businesses located in these zones received a tax credit for employees and
―expensing‖ tax credits for investments (The Clinton Administration‘s National Urban
Policy Report, 1995, p. 50). In Detroit, one of the first empowerment zone cities, more
than two billion dollars in private-sector commitments were reported. The EZ was a
major resource for public and private enterprises in Detroit during Mayor Dennis
Archer‘s era in 1990s and its investment reached $956 million (of its 10-year pledge of
$1.1 billion) in 1998 (The State of the Cities, 1998, p.10).
Federal grants-in-aids to state and local governments also increased between 1990
and 2007. Whereas federal grants to state and local governments shared less than 5% of
GDP during this period, the share of federal grants in state and local government
expenditures reached approximately 30%, though the percentage gradually declined
between 2005 and 2007.
However, still some cities received specific federal aid and grants to alleviate
their problems, and federal support has been a major resource for accomplishing local
goals. At the same time, the percentage of federal grants-in aids did not significantly
shrink in the state and local government expenditures over time. Figure 4.1, below, shows
the change in federal grants-in-aid to state and local governments between 1990 and
2007. The table indicates that federal grants-in-aid still covered approximately 30% of
state and local government expenditures between 1990 and 2007 even though the annual
percentage of federal grants-in-aid fluctuated between 1.3% and 12% over time. It shows
the importance of federal aid in state and local government expenditures even under the
new federalism that has reduced the federal government‘s financial responsibilities.
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Figure 4.1 Federal Grants-in-Aid to State and Local Governments: 1990-2007 (%)
Source: Table 414. Federal Grants-in-Aid to State and Local Governments: 1990
to 2007
State and local governments‘ summary of finances between 1990 and 2005 also
shows that the federal government‘s financial contribution in revenue increased over
time. In 1990, state and local governments received 136,802 million dollars from the
federal government and, in 2005, 438,432 million dollars was given by the federal
government
18
(U.S. Census Bureau 2007).
18
See Table 417 in State and local governments-summary of finances: 1990 to 2005.
0
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35
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2007
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expenditures
Federal outlays
Gross domestic product
107
Figure 4.2 State Government Revenue Per Capita, 1980-2003
Source: Census Government Finance Section 9 State and Local Government
Finances and Employments.
Among selected federal aid programs, the Department of Housing and Urban
Development shows the federal government‘s direct and indirect influence on regional
economic development. Compared to other programs, such as transportation and
education, training, employment, social services and health programs, community and
regional development, the Department of Housing and Urban Development received
relatively few grants from the federal government. These programs affect regional
economic development especially for some cities that suffered from the demise of their
inner cities.
0
200
400
600
800
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1,400
1980
1990
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Intergovernmental
Revenue
from Federal
Government
From Local
Government
108
These grants provide relatively sufficient financial support for state and local
governments to alleviate their problems. For example, in 1990, the federal government
provided 4,965 million dollars in grants to state and local governments in community and
regional development programs; in 2008, the amount reached 21,255 million dollars
(U.S. Census Bureau 2007). These numbers indicate that the federal government still
plays a role in regional development.
The reasons why federal government aid has continued vary. Even though the
federal government declared a ―New Federalism,‖ in which localities have more
responsibility in local affairs and less support from the federal government, specific cities
and regions still desperately need federal support and the federal government has
maintained aid programs for states and cities in order to alleviate urban problems.
According to Moore and Stansel (1993), the federal government has spent an estimated
$2.5 trillion in the ―War on Poverty‖ and urban aid and, in 1992, federal aid to state and
cities rose to $150 billion, the largest amount of federal intergovernmental aid ever.
Federal aid may not provide sufficient money for a city to rebuild its economy,
especially with strict regulation over federal funds meant solely to focus on welfare
issues and inner-city poverty alleviation. For example, federal housing policy plays a
significant role in shaping urban neighborhoods. Yet, federal housing programs are
largely designed for ―strong market‖ cities and metros with affordable housing pressures,
and are generally inappropriate to the needs of older Rust Belt communities (Brookings
Institution, 2006). As a result, once cities received federal housing program funds with
an affordable housing plan, the city‘s developmental plan may revolve around the federal
109
program. Therefore, federal funds may function as a constraint to local economic
development. In relation to local governments in federalism, local leadership is too
comfortable to compete (racial/ideology). Once elected based on racial support and
ideology, leadership tends to maintain its position for quite a long time. Therefore,
leaders are often less concerned about serious economic restructuring and economic
boosters such as the promotion of new industry or proposing new incentives for business
in order to capture a new constituency.
A federal system supports more autonomy for localities to decide their affairs.
The U.S. federalist system has no national economic development plan such as in Korea.
Instead, the U.S. government tends to follow more market-driven forces regarding the
local economy. Even though there has been federal government intervention in several
cases, most cases were considered ―after treatment style‖ rather than preemptive acts. For
example, Detroit has been one of the federal government‘s ―favorite‖ cities. ―Favorite‖
may be a negative term here, but in many cases, Detroit has been one of the federal
government‘s beneficiaries with regard to its local economic social crises. Pittsburgh has
not been an exception but the results over time have been mixed. Whereas Detroit still
struggles from many local issues such as the decline of its local economy due to the
demise of the automobile industry, Pittsburgh— in spite of the severe hardship of the
1980s— has revived its economy through high technology industries and new types of
service industry such as healthcare. Even though it received federal assistance in the
1980s, Pittsburgh has been resilient in fostering an economic revival.
110
Detroit: Constant Federal Aid Beneficiary
At the time of the 1990 census, the city of Detroit was the largest city in Michigan
and the seventh largest city in the United States. Internationally known for automobile
manufacturing and trade, Detroit is also a regional banking center and home to many of
the nation‘s largest corporations. The economy of the metropolitan Detroit region has
been shaped historically, and remains dominated, by the auto industry. It is home to the
U.S. headquarters not only of the Ford Motor Company, but also of General Motors and
the Chrysler division of DaimlerChrysler. The influence of the auto industry shows itself
in virtually every aspect of the city and its region. The auto industry‘s centrality is
witnessed, for better and or worse, in employment statistics for the metropolitan area.
Between 1975 and 1999, metropolitan Detroit lost more than one out of four automotive
jobs as employment in auto assembly and parts and stampings plunged from 304,000 to
220,000. There was also decline in overall manufacturing employment of roughly the
same magnitude. The central city of Detroit itself remains one of the nation‘s poorest. Its
child poverty rate is consistently at or near the top for major U.S. cities. There are still
large pockets of unemployment and entire neighborhoods that stand virtually
abandoned— the legacy, in large part, of the loss of the auto-related manufacturing jobs
that once anchored the city‘s prosperity.
111
Table 4.1 Unemployment Rates for Selected Cities (50,000 or more population)
19
Year Detroit Pontiac Southfield Warren
1989 10.9 11.5 4.2 6.6
1990 14.3 15.5 6.2 8.7
1991 16.9 18.8 7.8 10.6
1992 16.9 19.2 8 10.1
1993 13.5 16.3 6.6 7.9
1994 11 12.3 4.9 6.6
1995 9.9 10.4 4 5.5
1996 9 9.4 3.6 4.8
1997 7.9 8 3.1 4.1
1998 7.3 7.3 2.8 3.8
1999 7 7.2 2.7 3.8
2000 6.5 6.4 2.4 3.7
2001 9.7 10.9 4.2 5.8
2002 11.5 13.7 5.5 7.1
Source: Table 17: Unemployment Rates for Selected Cities (50,000 or more population)
In 1993 Detroit was one of the first cities to receive the federal Empowerment
Zone Program Fund. The empowerment zone/enterprise community (EZ/EC) program
was established in the fall of 1993 under the Federal Omnibus Budget Reconciliation Act
and was the Clinton Administration‘s community revitalization strategy. On December
21, 1994, round I urban EZs– Atlanta, GA, Chicago, IL, New York, NY (Upper
Manhattan), New York, NY (Bronx), Cleveland, OH, Baltimore, MD, Detroit, MI,
Camden, NJ, Philadelphia, PA, and Los Angeles, CA— each received $100 million in
performance grants for job creation and job-related activities. Also, Michigan state
19
From a child‘s perspective, see Center for Urban Studies, (2002, Sept.), Detroit
metropolitan census 2000 fact sheets series, 2(3); Poverty and income profile for the tri-
county area and by selected communities.
112
created Renaissance Zones including the city of Detroit Renaissance zone, which is free
of all state and local taxes for businesses located within its boundaries. This zone
combines industrial, commercial, and residential sites and shows a cooperative effort
among different levels of government to promote local economic development.
20
The
question remains, however: Why did Detroit‘s economic development not revitalize the
city in spite of these various attempts?
Pittsburgh: Transition Without Federal?
Pittsburgh‘s economic struggles accompanied the decline of steel industry. By the
1920s, Pittsburgh produced one third of the national output of finished and rolled steel.
Pittsburgh‘s region had one of the world‘s largest steel mills, structural steel plants, and
construction fabricating plants. A heavy reliance on the metal industries resulted in
economic stagnation and decline in the Pittsburgh economy when these industries
experienced decreased demand and increased competition from foreign markets. In the
early 1980s, the city‘s survival was in question. Due to heavy pressure from foreign
competition in 1970s and 1980s, the steel industry in Pittsburgh began to collapse.
Following the recession, steel mills laid off close 160,000 workers and began to shut
down factories.
20
The Michigan Economic Development Corporation, Michigan Renaissance Zones
http://ref.michigan.org/medc/services/sitedevelopment/renzone/index.asp
113
Federal support for the declining steel industry can be seen in several examples, such as
the Wheeling-Pittsburgh Corporation recovery attempt. In order to recover the Monessen
Mill, PA, the Carter administration placed five loans worth $365 million under a special
loan-guarantee program (Washington Post, 1988).
Although the guaranteed loan program failed to recover the steel mill, this attempt
showed the federal government‘s willingness to intervene in the local economy and
market when the crisis occurred. The government directly affects ―capital formation in
steel through tax policy, research and development spending, import restraints, antitrust
policy, and environmental regulations‖ (Congressional Budget Office, 1987). Selected
federal programs providing support for the U.S. steel industry show that the U.S. federal
government paid attention to the impact of the industry on the market and on the local
and national economies.
114
Table 4.2 Selected Federal Programs Providing Support for the U.S. Steel Industry
Year
Program Purpose Estimated
Costs
1974
Employee Retirement Income
Security Act of 1974, as
amended
The U.S Government, through the
Pension Benefits Guarantee
Corporation assumed billions of dollars
in pension liabilities for U.S.
companies, particularly in the steel
industry.
Between $1.4
and $2 billion
1980s
Department of Commerce EDA
loan guarantees pursuant to the
Public Works and Economic
Development Act of 1965
As part of a steel industry aid program
of the Jimmy Carter presidency, EDA
established a special guaranteed loan
program for the basic steel industry.
$322 million
1984
Steel Import Stabilization Act
of 1984
Established steel ―voluntary restraint
agreements‖ restricting imports of steel
into the U.S.
$1.3 to $1.9
billion
annually from
1984-1992
Department of Energy Clean
Coal Technology Program
This program was created to subsidize
the construction and operation of
facilities to demonstrate the potential
commercial feasibility of clean-coal
technologies. It was specifically
targeted to industrial users of coal,
especially the steel industry.
$2.3 billion
(1985-1998)
1990s
Department of Energy Office of
Industrial Technologies
Direct Steel Making/Steel Plant Dust
and Sludge (Waste Oxide) Recycling
Project
$47 million in
1995
1998
Transportation Equity Act for
the 21
st
Century
Reauthorizes federal highway and mass
transit programs, retaining the domestic
steel industry preferences enacted in
previous transportation laws
1999
The Emergency Steel and Oil
and Gas Guaranteed Loan
Program Act
Establishes a program of Loan
guarantees to steel companies unable to
obtain credit for continued operations
and reinvestment in facilities
Up to $1
billion in loan
guarantees.
$140 million
appropriated
for ―additional
costs‖ and $5
million for
―expenses‖
Source: Subsides to the U.S. Steel Industry: Are They ―Market-Distorting‖ Practices That
―Support Economically Unjustifiable Steel Production?‖ The American Institute for
International Steel
115
As Table 4.2 shows, America‘s federal government paid particular attention to the
steel industry. However, when U.S. Steel requested a loan to alleviate the company‘s
financial crisis in late the 1970s, the federal government was not forthcoming. The
federal system grants relatively autonomous power to localities to decide on their affairs.
Along with their mixed relationship with federal government, state and local
governments play a significant role in shaping local economic development paths.
Although the State of Pennsylvania tried to rejuvenate the steel industry in the 1990s,
Pittsburgh did not receive federal support such as the empowerment zone program in
Detroit. A wide gap exists between federal and other aid for the two cities. Support from
federal and state governments was much higher in Detroit than in Pittsburgh. Per capita
intergovernmental revenue in Detroit increased drastically in the state of Michigan
between 1997 and 2002 from 657 dollars to 2,120 dollars. Compared to Detroit,
Pittsburgh showed a subtle increase in per capita from the federal and the state between
1997 and 2002, from 198 dollars to 209 dollars. Even though intergovernmental revenue
between the state and local government increased 70% between 1991 and 1997, federal
level intergovernmental revenue did not change significantly compared to Detroit.
Between 1992 and 1997, Detroit received $127 and $226 per capita in federal aid,
whereas Pittsburgh received only $57 and $87 in each year. State aid also indicates that
Detroit continuously received more state attention compared to Pittsburgh. In 1992
Detroit received $521 compared to Pittsburgh‘s $58, and in 1997 state aid increased to
$657 in Detroit and $198 in Pittsburgh. In 2002 Detroit received $2,120 from the state of
Michigan, whereas Pittsburgh‘s state aid per capita was $209.
116
Table 4.3 Pubic Revenue and Intergovernmental Aid for the City of Detroit and
Pittsburgh (per capita)
Detroit Pittsburgh
1992 1997 2002 1992 1997 2002
Total Revenue 2000 2996 4588 1109 1526 1660
Total General
Revenue 1534 1971 4075 1017 1381 1519
Intergovernmental
Aid 691 911 2493 247 388 209
Federal Aid 127 226 373 57 87 108
State Aid 521 657 2120 58 198 209
Source: Finances of Municipal and Township Governments: 1992, 1997, 2002, Table 18.
Finances of Individual Municipal governments with a Population of 25,000 or more by
State
4.3. Korean Cities in a Unitary System
Korea‘s unitary system has a strong national government role in many local
affairs. Its developmental state model suggests a strong national government role in
economic development for several decades. Even though the decentralization process, the
Korean government established several development plans to address imbalanced
territorial development. Once the plan was developed, the national government handed
down the guidelines to local governments. However, the plan was not a detailed as the
previous one during the decentralization.
It is somewhat difficult to generalize the characteristics of a city in a unitary
system, especially in the Korean case because of the rapid institutional change that has
taken place since the early 1990s. Before the Local Autonomy Act, city or local
government did not play significant role in shaping local economic development.
Between 1961 and 1991, local governments in Korea were instrumental to accomplishing
117
the goals of the Korean developmental state, even without holding local elections. During
this period, all high-ranked local government officials including governors and mayors
were appointed from the center (Kang, 2006). Their main functions were service
delivery and national policy implementation; conflict between the national and local
governments was rare. However, while the characteristics of the city in the transitional
period changed even in unitary system, the same governmental structure has remained:
central government, provinces, and local government. The local government in Korea is
divided into two tiers, consisting of 16 provincial and 230 municipal governments; 16
provinces include 7 metropolitan cities, and 9 provinces and municipalities have 69
metropolitan districts, 75 cities, and 86 counties (Hwang, 2006)
Due to the decentralization process, local governments including provincial
governments started to exercise their newly expanded power and realized new
opportunities as well as harsh realities in the form of competition. Deregulation allowed
cities to seek their development possibilities. Some local governments made a greater
effort to maintain existing industry as well as to promote new industry vigorously; others
sought more central government subsidies to alleviate their underdevelopment situations,
promoting ―unwanted‖ national projects such as siting new nuclear waste plants in their
regions. Local governments have actively lobbied central government even though they
do not expect the same support from the central government and they regard the central
government as an open resource and ―fair game.‖ Local governments and local leadership
create close relationships with neighboring cities to deal with many issues, including
environmental and economic development. In relation to local direct elections, local
118
leadership has responded more sensitively to local demands. Local governments have
tried to establish close relationships with business, creating official or unofficial
committees for business and civic organizations to attend and discuss local economic
development.
Historically, the ―city‖ has not been well known as a subject of study due to
national government domination in the policymaking process. Many Korean cities were
established from 1961 to 1985— a period of rapid economic development. Industrial
cities such as Ulsan and Pohang were the end-result of the national government economic
development plan. During the 1960s, the national government drove the strong state-led
economic development plan, specifically concentrating on heavy industry. As a result,
Ulsan became one of the first new industrial cities where heavy industries were located
(Korean Cities, 1999). During the rapid economic development period, the national
government established several city-related policies to alleviate urban issues such as
population overmigration to the big cities and imbalanced territorial development.
Korean industrial policy involves selecting key sectors, working with, and
developing the dominant Chaebols, or large firm conglomerates, over four decades
(Amsden, 1989). In particular, three eras can be identified: labor-intensive industries
such as textiles and apparel in the 1960s and early 1970s; chemicals and heavy industries
including automobiles, shipbuilding, petrochemical, machinery, and consumer electronics
in the 1970s (Lee, 1988; Park, 1990); and high-tech industries such as semiconductors
since the 1980s. At the same time, the Korean government influenced regional
development patterns by exercising its command over the private sector. Early industrial
119
policy disregarded the consequences of special concentration such as overpopulation and
pollution in the Seoul region. Being aware of the potential problems regarding congestion
in the Seoul region, the national government encouraged firms to locate outside of Seoul.
Political concern was paid to the locational consequences of having firms in certain
regions. In the 1970s, the government aggressively seeded new industrial complexes
outside the Seoul region. With this effort, several regions are now known for having
specialized industrial complexes.
City policy in South Korea since 1960s clearly defines the status of the ―city‖ in
the Korean Unitary system. The Korean Constitution does not provide legal status for the
―city.‖ Rather, a city is an administrative unit with population size as a determinant, and
city policies in national government have been mostly containment policies, specifically
Capital Region Containment Policies.
120
Table 4.4 Overview of Korean City Policies Since the 1960s
Period National Industrial Policies Urban Policies
1960-
1972 Light Industry focus
Prevention of overpopulation in Seoul
region
South East coastal area
development
New industrial cities including Ulsan
were elected
Capital area including Seoul
development
1973-
1980 Heavy industry focus Suppression of Seoul expansion
South East coastal region
development South-East Development plan
Industrial complexes
establishment
Growth Poles: Ulsan, Pohang, Masan
and Onsan city
1981-
1987 Industrial structure adjustment Inner-city reshaping
Establishment of small-medium
industrial complexes Balanced Territorial Development
Continuing suppression of overgrowth
in Capitol Regions.
New local city establishment
1990s- High Technology focus Deregulation of national city policies
Source: Korea Research Institute for Human Settlement, 1998 and 2006 and national
Archive, http://contents.archives.go.kr/next/content/listSubjectDescription.do?id=001372
As Table 4.4, above, shows, city policy in South Korea has been part of national
economic development policies and the main purpose of city policy was the containment
of big cities, especially Seoul and later the ―Capital Region.‖ In addition, before the 1991
Local Autonomy Act, cities rarely established their own development policies without the
consent of national government. However, with the 1991 Local Autonomy Act, the
decentralization process challenged the city government‘s capacity to determine local
economic development pathways.
121
Local government demanded autonomous power to seek its own development and
created more conflict with national government in order to obtain direct and indirect
national government support. These changes evidence new roles and positions for local
governments. In a unitary system, the relatively simple structure between national
government and subnational government placed less pressure on cities. However, not
every city has prospered through the transition. Many cities have suffered from
underdevelopment and a long history of uneven territorial development has scarred
several regions in the era of decentralization. Their continued suffering indicates that the
embedded local capability to govern the new situation does matter. Within the existing
national economic development plan, the governing capacity of local governments
reveals significant disparity among localities.
Ulsan Metropolitan City: Constant Beneficiary
Ulsan Metropolitan City is one example of a city maintaining prosperity as a
previous ―favorite city of national government‖ after decentralization. In 1962, the
national government appointed Ulsan a ―Special industrial Region.‖ Ulsan did not lose
industrial city status over time, even though many cities suffered from economic
restructuring and the decline of the manufacturing industry. Even though Ulsan also
experienced economic restructuring, by shifting from its reliance on heavy industry to a
more balanced economic structure between the manufacturing industry and the service
industry, the economic structure in Ulsan has not changed significantly over time.
122
Table 4.5 Changes of Economic Structure in Ulsan (1962-1997)
Year First industry (%) Second industry (%)
Third industry
(%)
1962 56,302 (88.2%) 1,312 (3.6) 6,252 (17.2)
1971 55,136 (80.9) 14,743 (14.3) 33,285 (32.3)
1980 22,842 (20) 74,415 (57.3) 29,562 (22.8)
1990 8,956 (5.8) 117,161 (76.3) 21,439 (17.9)
1997* 31,745 (8.9) 151,558 (42.7) 171,676 (48.4)
*In 1997, City of Ulsan became the Ulsan Metropolitan City and annexed Ulju town.
Source: Korean Cities, Table 17-3 Changes of Economic Structures in Ulsan (1962-1997)
recited, p. 590
Table 4.5, below, shows the changes to the economic structure in Ulsan between
1962 and 1997. Over time, the share of the manufacturing industry did not change
significantly. The status of Ulsan as an industrial city has been reinforced over time.
One of the city‘s government officials mentioned Ulsan‘s status as ―Industrial Capital of
Korea,‖
21
which means that Ulsan City does not lose national government attention no
matter how much national economic development plans change. One of the
characteristics of the developmental state is a national economic development plan. Since
1962, Korea has had several five-year national economic development plans to boost the
economy. According to these plans, one of the foremost tasks was to establish heavy
industry in order to catch up with other industrialized countries.
21
H. Chang. (2009, June 10). Interview with Ulsan Metropolitan City Official.
123
As a result, the Korean national government appointed several specialized industrial
cities in the South East region (Yong-Nam region) where Ulsan and Pohang city were
located. National economic development plans allowed the Ulsan area to cultivate new
heavy industry such as petrochemicals, automobiles, heavy machinery, and later industry,
which are pillars of the current local economy.
Ulsan has been a ―favorite city of the Korean government‖ because of its
industrial importance to the national economy– a situation that did not change
significantly even after decentralization in 1991. During an interview, one Ulsan city
government official described the city‘s relationship to the national government as a
constant. According to the Ulsan city government‘s point of view, little change has
occurred in terms of benefits from the national government no matter what type of
government has been established. One interesting point about the relationship with the
national government is Ulsan‘s successful promotion of a national university and the
KTX station in Ulsan city during the previous administration. Chamyo Jungbu
(Participatory Government: Roh Moo Hyun Administration between 2002-2007) was
known as a less business friendly government than past administrations and there was
speculation that conflicts between the Chaebols (big conglomerates) and the Blue House
(the president) worsened during that period. Many assumed that Ulsan would fall victim
to those conflicts due to the location of many big conglomerates‘ main factories in the
Ulsan area.
124
However, even under the less sympathetic national government, Ulsan did not receive
unfair treatment. Rather Ulsan successfully promoted the national universities and KTX
station.
22
. A director of economic development specifically explained that Ulsan ―will be
forever favorite city because it is the industrial capitol of Korea.‖
One of the interesting efforts that Ulsan city government has conducted since the
decentralization is the revival of Taewha River. Because of rapid economic development,
Taewha River in Ulsan became a symbol of the environmental degradation of industrial
development. In order to revive the river, Ulsan government established a six-year
environmental improvement plan between 1998 and 2003, and later a second
environmental improvement plan between 2004 and 2008. Taewa River‘s revival became
one of the more successful tasks under the local post-decentralization government.
Pohang: Consistent National Government Support
Pohang has a similar situation due to the steel company Pohang Iron and Steel Co.
Ltd. (POSCO). POSCO was established in 1968 as the one of the main industrial
strategies in the national government economic development plan and is currently the
second largest steel producer next to Japan‘s Nippon Steel. The national government was
significant to Pohang‘s economy boosting in the 1970s and 1980s. The national
government not only acted as the main initiator but also became the largest funding
source during the rapid expansion of the steel industry in the Pohang region. Known as
22
KTX is the Korean Train Express, South Korea‘s high-speed rail system, which
connects Seoul to Busan. The location of KTX has brought serious political debates not
only because of its political and economic impact, but also because of regional pride.
125
the ―Mecca of Korean Steel Industry,‖ Pohang city shares its destiny with POSCO.
Compared to Ulsan city, the industrial history of Pohang city started relatively late, in the
early 1970s. Since the first establishment of the steel plant in Pohang, POSCO and
Pohang city have been inseparable. Even though the overall economic structure has
changed from a manufacturing- dominant city to a more service-oriented city, still
Pohang city considers itself an industrial city, specifically a ―high-tech steel city‖
(Pohang City Government White Paper 2008). The economic structure in Pohang
changed significantly with the establishment of POSCO. In 1991, the share of
manufacture industry in Pohang was 61% of the local economy, compared to 29.1% in
1971. Although the share of the manufacturing industry in Pohang reduced to 6.5% in
2006, clearly Pohang city did not consider itself a service-oriented city due to the
characteristics of service industry within region.
126
Table 4.6 Pohang Industrial Characteristics
Industrial
category
Number of
company
Percentage
Number of
workers
Percentage
1
st
Industry
31 0.2 404 0.2
(Agriculture
and fishing)
Manufacturing 2,206 6.4 35,852 22.7
Construction 1,138 3.3 11,760 7.5
Retails 9,276 27 23,417 14.8
Restaurants 8,285 24.1 18,808 11.9
Transportation 3,380 9.9 9,304 5.9
Other
individual
service
4,179 12.2 9,659 6.1
Source: Pohang‘s Basic Statistics Report of Company 2006
Table 4.6, above, shows the general characteristics of Pohang‘s regional
economic structure in 2006. The manufacturing industry covers 22.7% of the workers
even though the percentage of the company in the region is only 6.4%, compared to other
industries such as retail and the individual service industry. This statistic means that
Pohang‘s industrial city image and position did not change even in 2006. Still, the
manufacturing industry remains a major factor in regional economic growth. Currently,
Pohang‘s major tasks are to build the Young-Il Port and Young-Il Port surrounding the
regional industrial park. Pohang city is considered the second wealthiest region after
Ulsan. Pohang and POSCO have been inseparable in the regional and national
economies. The importance of POSCO can be seen in the status of the industrial park.
POSCO itself resides in a single industrial park, which covers 45% of the total industrial
park in Gyeongbuk (North Gyeong Sang Province) and provides 13% of the total annual
127
product in Gyeongbuk Province. However, recent concerns regarding the decline in
population and the heavy dependence on almost a single industry means that POSCO has
received more attention from the city government. POSCO‘s influence does not seem to
reduce over time.
Ulsan and Pohang: Constant Beneficiaries
Cities favored by the central government during the rapid economic development
period have tended to preserve a better governing capacity others, even though they no
longer received the same favoritism from the central government. They had already
established economic strength, well-connected networks with the central government,
national politicians from their regions, relatively well-organized local bureaucracies, and
somewhat strong civic participation, compared to other cities. In relation to central
government‘s support, even though ―previously favorable‖ cities lost their monopoly
over central government support, their economic status in the national economy remains
influential. As a result, whenever a national economic plan is discussed, these cities tend
to be taken into consideration for the sake of the national economy.
In case of Ulsan and Pohang, national government support was not significantly
reduced by the decentralization process. Trends in national government subsidies in each
city show continued increase. Interestingly, subsidies in Pohang between 1998 and 2000
showed a decrease, which may be a partial result of POSCO‘s privatization process.
128
Compared to Pohang‘s partial fluctuation of subsidies, Ulsan‘s subsidies increased even
after the city earned the Metropolitan city status in 1997. In addition neither city‘s
subsidies bore a negative impact from the 1997-8 economic crisis in Korea. Even
between 1997 and 1998, they both received more subsidies from the national government
than other regions.
Figure 4.3 Subsidies Per Capita in Pohang and Ulsan, 1994-2005
Source: Municipal Yearbook, each year
This Local Transfer trend graph shows the increase of transfer funds over time,
except between 2001 and 2003 in Pohang, a period of fluctuation. Local Transfer fund,
started in 1991, is a block grant used for five broad local functions: roads, sewage,
regional development, rural area development, and juvenile care. The Local Transfer
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Pohang
Ulsan
129
Fund Act specifies the fund‘s distribution method and share of target projects. In 2001,
48% went to local road construction and maintenance projects, 25.6% to sewage
treatment projects, 17.8% to regional development projects, 8.1% to rural development
projects, and 0.7% to youth-related projects (Kim, p. 245).
Figure 4.4 Local Transfer Per Capita, Pohang and Ulsan, 1994-2005
Source: Municipal Yearbook, each year
Both cities paid close attention to the economic development sector in their
annual expenditure. In 1995 Ulsan spent close to 63% of its general expenditure for
―economic development,‖ whereas Pohang poured 55% of general expenditures into
economic development. However, the percentage of economic development
expenditures gradually declined over time.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Pohang
Ulsan
130
Table 4.7 Percent Change of Economic Development Sectors in General Expenditure
Industrial Development
Local
Development Economic Development
1995 1995 1998 2002 2004
Pohang 13 42 29 30 35
Ulsan 8 55 38 30 33
Source: Korean Municipal Yearbook, each year. In 1998, the former Industrial
Development and Local development section merged into the ―Economic Development‖
section.
4.4. Conclusion
Federal and unitary systems provide environments for the cities to influence their
own policy decisions. Under a national economic development plan such as the Korean
five-year national economic development plan, cities have few opportunities to express
their opinions and seek their own destinies. On the contrary, the federal system provides
room for a city to pursue its destiny among three policy choices. However, most cities
tend to pursue developmental policies to secure revenue and attract new investments. By
doing so, a city seeks prosperity, a tendency that is relatively easy under the federal
system.
Intergovernmental relationship can be either directive or competitive. The Korean
case has been in transition. It is difficult to draw conclusions about Korea‘s
transformation toward a competitive intergovernmental relationship due to the national
government‘s influence and its economic plan. Detroit became an example of how
different cities in a federal system demonstrated different positions. Even though, there is
neither a national economic development plan nor a national city policy in the American
131
federal system, Detroit had a long history of being in the spotlight of national interest due
to its historical legacy. Interlocal and regional competition for capital and business may
be waxing in more general areas. Not only in the federal system but also in the unitary
system, more interlocal competition is taking place. Local competitiveness and the
attraction of a new capital became a main concern to local governments. In order to
sustain local competitiveness, most local governments use a variety of methods for
drawing business attention to their localities. This phenomenon is more widely accepted
in the federal system.
Findings about whether institutional environments act as a constraint or an
opportunity for local economic development are summarized in several ways. First, with
the federal-unitary dichotomy in the United States, Detroit and Pittsburgh both
experienced federal aid one way or another. In Detroit, federal government assistance
came with specific regulations and conditions. The federal government‘s general policies
such as housing assistance and highway expansion programs resulted in an unexpected
side effect: suburbanization. Suburbanization led to inner city-suburb tension and reduced
the policy efficiency of city government. Pittsburgh experienced federal government
assistance differently. Before the collapse of the steel industry, federal government
assistance/aid to the steel industry served as a constraint to local economic development
because it left little room to restructure the local economy. However, after the collapse of
the steel industry, the lack of federal aid gave the city new opportunities to restructure its
local economy.
132
The Korean cases consistently show the influence of national government on the
local economy. Both cities are a part of a national economic development plan to embed
industries in localities. Even after decentralization, the national government paid close
attention to these two cities due to the economic importance of their industries. There are
differences, however, between Ulsan and Pohang. The Ulsan Metropolitan City
Government guaranteed the equivalent administrative power to the Province under the
constitution, which means that Pohang needs to deal with its Provincial government as
well as national government when it makes an economic development plan.
Simultaneously, the industrial structure in the cities varies. Even though both cities are
categorized as industrial or manufacturing cities, the difference in industrial structure in
both cities reveals a possible other explanation as to why Ulsan and Pohang‘s economic
development pathways differ.
133
CHAPTER 5:
ASSET SPECIFICITIES AS DETERMINANTS OF LOCAL ECONOMIC
DEVELOPMENT
5.1. Introduction
Local economic development is the result of complex relationships among actors
in localities. Not only have the processes of internationalization and globalization
intensified the complexity of economic and social interrelationship among local actors,
but also particular relationships between business and local government have shaped
local economic development over time. Relationships between business and local
governments in local economic development have received significant attention from
various studies and the impact of business in localities has become its own subject in
globalization studies. Studies that explain local economic development concentrate on
characteristics of industry and spatial developments (Scott 1988; Storper, 1995; Storper
& Scott, 1992). These studies show how international market and local labor market
activities intertwine with industries and also explain how ―place-based technological
leadership is driven by the trust and reciprocity involved in buyer-supplier relationships,
couple with institutional support and the potentialities of the human resource base of the
local labor market‖ (Plummer & Taylor 2001, p. 235). The intertwined relationship
between the international market and local economy has also been explained with a
competitive advantage explanation (Porter, 1990, 1998).
134
This chapter discusses how local industrial structures and their relationship to
asset specificity affect local economic development in the two countries. The previous
chapter discussed the role of government in different political settings and how the role of
national government influences local economic development. Arguably, the role of
national government— regardless of the difference in political setting— impacts
decisions around local economic development. National government in a federal system
more indirectly influences local economic development, whereas a unitary system
government such as Korea directly maps the local economy over three decades. However,
it became more complex to understand local economic development paths once the local
economy was dominated by local industrial structures. If a single industry dominates the
local economy over time, local economic development cannot escape the influence of
that particular industry since its influence has been significant in many ways including
through local revenue and the labor market. On the contrary, a diversified local industrial
structure will provide a different explanation of local economic development and its
impact on the local economy.
In order to understand local economic development and the impact of various
actors on it, the complex relationship between business and local government must be
considered. The explanation is loosely rooted in transaction cost economics with regard
to asset specificity and uncertainty, as explained by Oliver Williamson (1985, 1988).
Although transaction cost economics serve as an influential explanation as to why firms
interact and create specific governance structures, the implication of transaction cost
economics shed light on what influences different local economic development pathways.
135
Among other factors, asset specificity serves as an explanatory tool for the relationship
between business and local government. This argument relies on transaction cost
theory‘s mechanism and how the mechanism interacts with different industrial structures
in locality such as a single dominant industry and a fragmented industrial structure in
cities.
5.2. Transaction Cost Approach
In order to understand differentiation in local economic development, one must
examine not only the internal dynamics between business and local governments but also
the external factors such as growing interregional competition and the involvement of
higher level governments. Transaction cost theory helps explain the complexity of these
relationships. With original contributions made by Coase (1937), transaction cost theory
explains a firm‘s effort to maximize profit. Profit maximizing involves cost minimizing
activities and two main costs are discussed in the theory— production costs and
transaction costs. Because the market does not provide a ―perfect environment‖ in which
full information is available to all parties, transaction cost can explain why firms relocate.
Transaction cost theory assumes that human agents are subject to bounded rationality and
the threat of opportunism (Williamson, 1981, 1989). This analysis considers the business
firm as a governance structure rather than a production function and focuses on three
aspects as transactions: the frequency with which they recur, the degree and type of
uncertainty, and the condition of asset specificity (Williamson, 1989, p.143).
136
A transaction cost analysis framework helps us view organizations as a web of
contractual relationships. Each relationship-employment of a worker (business and
community) or the exchange of a product or service between suppliers and customers
(either city governments and business or business and community) is a transaction. If
local economic development is partly the result of the complex relationship between
business and government, it is meaningful for city government to obtain business
cooperation in local economic development in order to enhance the efficiency of local
economic development policy. From this point of view, complex relationships among
two assumptions and variables in transaction cost theory explain how different industrial
structures in a locality influence local economic development.
While business tries to maximize profits, political decision makers seek efficiency
of policy with or without cooperation from other parties. However, because of imperfect
information and because of growing regional competitiveness among localities, both
parties cannot consider all the possible courses of action, including which transaction
costs will exist in each activity. This bounded rationality provides opportunities for both
parties to evaluate potential benefits in many ways. Also the threat of opportunism needs
to be considered. Each party will act in a self-interested way in order to maximize profit,
and might attempt to take advantage of unforeseen circumstances that give them the
chance to exploit another party. Opportunistic issues will arise for both parties. For
example, a mayor may use business attraction as a political strategy for reelection or
business may undertake manipulative negotiations with a city government through its
dominating economic influence. In order to lower the transaction costs associated with
137
three variables, particularly asset specificity and uncertainty, each party seeks contractual
relationships each other. In the process, two variables are particularly considered:
uncertainty and asset specificity. For example, a lack of information about alternative
suppliers might lead firms to pay too high a price for a good. Simultaneously, city
governments cannot confirm whether a new business will be established in a locality as
promised; how much revenue would be generated by the new business; or whether there
is a possibility of relocating an existing industry. This imperfect environment creates a
range of uncertainties. Asset specificity is important because once asset-specific
investments are made, future trades are tied to this transaction, and in the future,
asymmetric relationships between or among parties will be decided.
According to Williamson (1975, 1985, 1991), transaction costs are greatest when
asset specificity is high. If the cost is higher than anticipated, companies either leave or
renegotiate with city hall to seek more incentives. However, this situation is divided into
two possibilities based on the local industrial structure. Single-industry economic
structures and multiindustrial structures give different levels of power to each actor. If
city hall recognizes the single industry‘s dominance in the region, it may be forced to
satisfy the industry for the sake of the local economy. In this case, a single dominant
industrial structure gives the business more power to demand the redirection of local
economic development. If the environment in the city is ―ideally‖ fit for the company
because of existing human assets in the region, it has a strong pulling factors and a tool to
reduce transaction costs for the company.
138
5.3. Different Localities, Different Realities: Asset Specificity
The transaction cost approach provides meaningful ideas about how to understand
the complex relationship between business and local government through asset specificity
and the uncertainty that both parties continuously confront. From a business perspective,
a stable business environment or supportive relationships with local government is an
important consideration when firms decide on crucial economic decisions such as
relocation or expanding in certain regions. Simultaneously, the attraction of new industry
or companies to a region has been a crucial task of local government since the 1970s.
Therefore, measuring the impact of existing and new companies in a locality plays a
significant role in local government‘s capacity. In this sense, it is meaningful to explore
asset specificity and its impact on locality.
In order to understand the impact of asset specificity and industrial structure in
localities, it is relevant to explore variations in asset specificity. Asset specificity refers
to the ―degree to which an asset can be redeployed to alternative uses and by alternative
users without sacrifice of productive value‖ (Williamson, 1989, p. 142), including human
asset specificity, physical asset specificity, and site specificity.
139
Whether assets in localities are highly specified to certain industries or highly replaceable
with others determines the impact of asset specificity. Asset specificity affects not only
ex ante incentive responses but also ex post governance structure formation, and the
impact of asset specificity intensifies based on local industrial structures.
23
Asset
specificity helps explain the rigidity of institutions and the (un)willingness of parties to
cooperate.
Human Asset Specificity
Human asset specificity relates in particular to industrial structures in localities. If
an industry operates in a region for a long time and cultivates a specific relationship to
local community, human asset specificity tends to be high. Specialized skilled workers
are an example of human asset specificity. For example, the automobile industry created
specific human assets in the department of research and design. Due to the complexity of
automobile design, the process of research and design in this industry requires
specifically skilled workers. In the current crisis in the automobile industry, manual
workers‘ numbers have declined, but skilled advanced workers remain in demand (US
Department of Labor). The steel industry shows similar human asset specificity.
23
Recent discussions about asset specificity have broadened from Williamson‘s definition
to greater range of types. For instance, human asset specificity can be divided into several
categories such as unskilled, semiskilled, and professional. At the same token, physical
specificity is categorized as physical plant, commercial building, and land. For more
discussion of measuring asset specificity, see Hainmueller and Hiscox, 2007.
140
Experienced steel workers were for a long time the main human asset in the Pittsburgh
region. However, once the local industrial structure was reshaped, human asset specificity
changed and the impact of human asset specificity varied based on the condition of the
local industrial structure.
Precisely defining skilled, semiskilled, and unskilled workers in human asset
specificity is somewhat ambiguous due to the lack of a universal standard. However, the
tenure rates of workers and the education level of workers can be indexed to determine
human asset specificity. As the duration of occupation lengthens, a worker‘s skill
increases. Therefore, the longer a worker occupies his/her job, the better skill he obtains,
and thus human asset specificity tends to be intensified. In general, job tenure in the
manufacturing industry is longer than job tenure in the service industry. Another
indicator of human assets is the average annual payroll. The higher payroll jobs are in the
locality, the higher asset specificity the locality tends to possess.
The automobile industry has been dominated Detroit‘s local economy since the
early 1900s. However, assembly factories have been dispersed outside the city
boundaries due to the improvement of transportation, particularly highways and
technological development. Detroit‘s automobile industry workers have different
qualifications. Since most auto part factories require relatively simple manual work,
human asset specificity is lower than in other places, except in the research and design
departments. This trend has intensified through technology development in downtown
Detroit. In 1997 GM purchased the Renaissance Tower, which remain its headquarters.
Other automobile companies maintain R and D departments and vehicle design sections
141
in the Detroit region, leading to a particular auto cluster. As a result, GM headquarters
remains one of largest employers in the city, functioning as a ―service industry‖ and not a
manufacturing industry. As a result, the human asset specificity in Detroit‘s automobile
industry has declined through the relocation of automobile plants over time. On the
contrary, Pittsburgh‘s steel workers remained experienced and skilled until the steel
industry collapsed in the early 1980s. After the steel collapse, Pittsburgh‘s human asset
specificity transformed into more service industry-specific assets. Healthcare and
education are new target industries in Pittsburgh, and the city has succeeded in acquiring
labor through Carnegie Mellon University and the University of Pittsburgh.
Korean cases show the preservation of human asset specificity in localities.
Within the manufacturing industries, job tenure tends to be longer than in U.S. cases. In
particular, Ulsan and Pohang‘s main industries— such as automobile, petrochemical,
shipbuilding, and steel— present longer job tenures than other industries. Education
attainment also shows relatively stable human asset specificity in the Korean cases. More
than 50% of the population received high school degrees and above since 1980, and the
percentage gradually increases over time.
U.S. Cases: Detroit and Pittsburgh
In Detroit and Pittsburgh, the resident percentage of high school graduates and
above in both cities increased between 1970 and 2000. In particular, growth in the
percentage of persons who obtained some college or associate degree has been significant.
In the City of Detroit, 29% of the city population had at least some college or associate
142
degree in 2000, compared to 7.5% in 1970. Pittsburgh shows a similar increase in the
category, from 6% in 1970 to 22% in 2000. However, Pittsburgh outnumbered Detroit in
number of college graduate with an advanced degree. Whereas 11% of the city of Detroit
had an advanced degree in 2000, Pittsburgh‘s statistic is more than double. Pittsburgh
clearly has a relatively significant share of advanced educational attainment, which may
be a crucial attraction for the advanced manufacturing and service industries.
Table 5.1 Percentage of Persons Aged 25 or More by Highest Educational Attainment:
Detroit City and Pittsburgh City
Year
Detroit,
MI
PMSA
Central
city of:
Detroit
city, MI
Suburbs
Pittsburgh,
PA MSA
Central city
of:
Pittsburgh
city, PA
Suburbs
Did Not
Graduate
High School
1970 48 58.2 41.8 47.2 54 45.5
1980 33.2 45.8 28 32.6 38.9 31.4
1990 24.6 37.9 20.2 22.7 27.6 21.8
2000 17.9 30.4 14.4 14.9 18.7 14.4
High School
Graduate
1970 33.3 28.1 36.5 36.3 30.7 37.7
1980 36.9 31.5 39.1 42.1 35.9 43.4
1990 30.3 27.7 31.2 38.7 34.6 39.4
2000 29.3 30 29.1 37.7 32.7 38.5
Some
College or
Associate
Degree
1970 9.4 7.5 10.6 7.3 6.3
7
.
5
1980 15.9 14.3 16.6 11.2 10.6 11.4
1990 27.4 24.8 28.3 19.9 17.8 20.3
2000 30 28.6 30.5 23.5 22.4 23.7
College
Graduate or
Advanced
Degree
1970 9.3 6.2 11.1 9.2 9 9.3
1980 14 8.3 16.3 14 14.6 13.9
1990 17.7 9.6 20.3
1
8
.
7
2
0
.
1 18.4
2000 22.8 11 26 23.8 26.2 23.5
Source: State of the Cities Data System: Census Data
143
Educational attainment between the two cities implies that human asset specificity
in relation to educational level has been changed over time. Clearly, Pittsburgh‘s
population has more advanced educations, which is attractive to the advanced
manufacturing and service industry. In Detroit, although the level of overall education
attainment increased between 1970 and 2000, why Detroit‘s local industrial structure did
not drastically change in response remains unclear. How closely level of education and
level of ―skill‖ are related is unclear, as no standard exists to measure the level of skill for
particular industries and educational attainment.
Conventional wisdom suggests a high positive correlation between level of
education and ―service‖ industry, but the manufacturing industry also requires on-site
experience through longer employee tenure. In the U.S., employees in the manufacturing
industry tend to have longer job tenures than those in the service industry. In 1983, the
average motor vehicle industry employee showed longer job tenure than workers in other
manufacturing industries, at close to 13 years. Other than motor vehicle equipment
industry, primary metal industry indicates relatively longer job tenure at 10 years.
However, the duration of job tenure in these industries drastically declined in the late
1990s.
144
In 2000, employees in the motor vehicle and equipment industries worked in the
same factory or company fewer than six years. Short job tenure in other industries may
indicate that Pittsburgh also experienced a decline in human asset specificity. For
example, the healthcare industry, which has become a major local industry in Pittsburgh,
shows no significant difference from the national average years of job tenure between
2000 and 2008. Between 2000 and 2008, healthcare-related occupations show an average
of 4.5 years of job tenure compared to 4.8 years in the manufacturing industry.
24
24
Table 6. Median years of tenure with current employer for employed wage and salary
workers by occupation, selected years, 2000-2008, Employee Tenure in 2008, United
States Department of Labor, Bureau of Labor Statistics News.
145
Table 5.2 Median Years of Tenure With Current Employer for Employed Wage and
Salary Workers by Industry, Selected Years, 1983-2000
Industry 1983 1987 1991 1996 1998 2000
Total, 16 years and over 3.5 3.4 3.6 3.8 3.6 3.5
Manufacturing 5.4 5.5 5.2 5.4 4.9 5
Durable Goods 5.6 5.5 5.2 5.4 4.9 5
Primary metal industries 10 10.2 9.7 8.1 8 7
Fabricated metal products 5.7 5.5 5.5 5.1 4 4.7
Machinery and computing
5.8 6.7 5.9 5.2 4.4 4.5 equipment
Transportation equipment 8.8 8 7.6 8.3 7.8 6.4
Motor vehicles and
13 11.2 11.7 7.8 6.4 5.8 equipment
Aircraft and parts 6.4 6.8 6.3 9.8 9.6 9.7
Source: Table 5. Median years of tenure with current employer for employed wage and
salary workers by industry, selected years, 1983-2000, Employee Tenure in 2000, United
States Department of Labor, Bureau of Labor Statistics
This trend has been seen in other manufacturing industries as well. The decline of
duration in job tenure over time indicates that the importance of specialized human asset
specificity has also reduced. Firms pay less attention to human asset specificity in their
regions, choosing instead to relocate the factory— a trend that has been intensified by
global competitiveness and labor flexibility.
146
Korean Cases: Ulsan and Pohang: Continuation of Human Assets
When Ulsan city became Ulsan Metropolitan City in 1997, its educational
attainment conditions did not change drastically. Employees who have obtained high
school degrees have become more stable since 1998. Close to 75% of workers in Ulsan
have received more than a high school degree and the percentage has consistently
increased up to 80% in 2008. A similar trend has been witnessed in Pohang city. In
Pohang, more than 66% of the population received a high school graduate degree or more
in 1996, and the percentage substantially increased by 2008, reaching close to 80%.
Based on this data, the average education level of the Korean workforce over the past
decade has been higher than that of the U.S.. However, projecting a simple positive
relationship between the level of education and degree of human asset specificity in the
region and in the industry is still difficult.
Both Korean cases show a strong dependency of the manufacturing industry on
the local economy and national economy. Each city has possessed specialized
manufacturing industries such as automobile, petrochemical, shipbuilding, and steel over
four decades and the current industrial structure has not changed significantly.
Simultaneously, even though both cases show higher than average educational attainment
compared to U.S. cases, this fact did not lead to a drastic industrial restructuring to a
knowledge-based economy and service-oriented industrial structure. Rather, the
relationship between higher education attainment and stabilized manufacturing industry
in the region seems more pertinent to maintaining the existing local industrial structure.
147
The duration of job tenure in the Korean cases seems to have enhanced human
asset specificity in the local industries. Table 5.3, below, shows employee tenure in
selected major companies in both cases, and each case illustrates long job tenure trends.
In particular, workers in the steel industry have the longest job tenure in the
manufacturing industry in Korea— up to approximately 20 years— whereas
petrochemical industry (SK) workers stay roughly 13 years in the same company. Even
though technological improvements have required higher education in almost every
industry, the longer workers stay in the same company, the more experienced they
become. As a result, firms tend to be more cautious of replacements due to higher human
asset specificity. The projected increase in educational levels and longer job tenure in the
manufacturing industry in both cases allow higher human asset specificity in Korean
cases, as compared to U.S. cases. Interestingly, job tenure in POSCO became longer over
time and POSCO was considered one of the sought-after firms for prospective workers
even after privatization was complete in 2000. Other firms‘ job tenures have shown a
steady increase over time and, compared to the service industry, the manufacturing
industry in Korea has relatively long job tenure.
Longer job tenure tends to secure specific job skills and cultivates specific asset
involvement in the region particularly in relation to human assets. In this trend, human
asset specificity in Korean cities tends to be higher than in the U.S.. Higher education
attainment and longer job tenure allows the Ulsan and Pohang regions to be ―specialized
industrial cities,‖ and higher human asset specificity secures long-term contracts between
business and local governments. As a result, local governments‘ direct and indirect
148
support for their main industries has continued. This enduring connection partially results
from the strong influence of the labor union in Ulsan. A correlation exists between labor
union activity and job tenure duration in the Ulsan region.
Table 5.3 Employee Tenure by Selected Firms in Ulsan Metropolitan City and Pohang
Source: Employee Status, POSCO Annual Business Reports, Hyundai Mipo Shipbuilding
Annual Business Reports, SK Annual Business Reports, Hyundai Heavy Industry Annual
Business Reports, each year (retrieved at Data Analysis, Retrieval and Transfer System,
http://dart.fss.or.kr/dsab001/main.do)
Year POSCO
Hyundai Motor
Company
Hyundai Mipo
Shipbuilding
SK
Petrochemical
Hyundai
Heavy
Industry
1999 13.6 10 12.2 8.2 n/a
2000 14.8 11.4 12.8 9 14.3
2001 15.7 11.4 11.1 9 15.2
2002 16.5 11.4 10.3 9 15.7
2003 17.1 12.3 11 5.8 16.1
2004 17.1 13.4 11.8 11 16.7
2005 18 13.6 12.8 12 17.4
2006 18.1 14.2 13.2 12 17.4
2007 19 14.9 13.3 13 18.3
2008 19.1 15.5 13.7 13 18.5
149
Ulsan‘s labor unions, in particular, the Hyundai Motor Company and Hyundai
Heavy Industries, are considered the most influential organizations for job security and
wage negotiation in Ulsan region. After the long history of violent conflict between the
company and the labor unions, Hyundai Motor and Hyundai Heavy Industries unions
began to play a crucial role in setting the percentage of pay increase.
25
Until 2000, POSCO was relatively free of labor disputes due to the public
enterprise status. Until 1988, POSCO was completely nonunion and described as
―patriarchal company welfarism,‖ whereby the company expected complete loyalty from
employees in return for a guarantee of lifetime employment. Even after 1988, when the
first labor union formed in POSCO, relations between the company and employees
remained relatively harmonious, and the first union was replaced by an ―employee
association‖ in the early 1990s. In general, relatively weak labor union activities in
Pohang have also helped build specific human assets in the region. Between 1999 and
2006, only 10 labor disputes were reported annually in the city of Pohang.
25
Labor disputes in Ulsan city, particular at the Hyundai Motor Company and Hyundai
Heavy Industries, have been well known in the history of Korean labor unions. Hyundai
Group founder, Chung Ju Yung, who once said ―I can allow the labor unions in my
company only over my dead body,‖ agreed to recognize labor unions in the Hyundai
Group in 1987 after shutting down seven of his conglomerate‘s 24 companies, including
Hyundai Shipbuilding & Heavy Industries, with 24,000 workers, and Hyundai Motor,
with 23,000 (Howard et al., 1987).
150
Physical Asset Specificity
26
Physical asset specificity plays an important role in understanding the relationship
between business and governments. Particular equipment or machinery that produces
input for a customer is an example of physical asset specificity. This is specifically
significant in case of the automobile industry as a single industry that dominates a region.
Due to the automobile industry‘s rigid vertical hierarchy between assembler and auto part
supplier, the dominant influence of a final assembler over small and medium auto part
enterprises is intensified through physical specificity. In this case, a final assembler
already dominates the regional industrial structure and its influence on the local economy
is inevitable, thus, local governments tend to maintain positive relationships with these
businesses.
If physical asset specificity is relatively high in the region, the impact of the
particular industry on the local economy increases because relocation of the facility
becomes less cost efficient. In this case, the firm would have less cooperative tendencies
toward the local government because it recognizes that its particular facilities figure
significantly in the local economy. Physical asset specificity tends to be higher in the
automobile industry because of the equipment and machinery.
26
Another example of asset specificity is site specificity, which refers to the geographical
proximity of assets for different stages of production. The previous steel industry shows
an example of site specificity. Due to the process of production, steel firms tended to be
located in certain areas with raw ingredients such as coal, which is one of the main
reasons why the Pennsylvania region became a ―heart of steel industry.‖ Since the early
stages of heavy industry require substantial amounts of water and minerals, rustbelt areas
could not replace their original factory locations.
151
Physical asset specificity is higher in the automobile industry than others since
individual auto parts have lower interchangeability.
27
Auto part industry firms play an
interesting role in creating physical asset specificity in regions. Since particular auto
parts are designed for a specific model, firms cannot meet the general demands. Once the
firm contract a certain model of auto company, the relationship becomes rigid and the
fate of that auto part firms depends heavily on the final assembly company. For example,
certain auto parts for Chrysler cannot be used in a Ford model. As a result, if that
company becomes a major local industry, the region tends to create physical asset
specificity for the firm. The equipment and machinery used by auto part suppliers in the
region cannot be transformed for more general use. As a result, the region becomes
vulnerable to the firm‘s activities, and transforming the local economic structure without
the dominant industry‘s cooperation becomes difficult.
The Korean case shows a somewhat different scenario from the U.S. cases. Due
to the scarcity of raw sources for heavy industry in the earlier stages of economic
development, many ―industrial cities‖ in Korea did not emerge naturally. Rather,
vigorous economic development plans by the national government in the 1960s
designated regions for specific industries. Ulsan and Pohang are leading examples of
how the national government‘s economic plan created a city as well as established heavy
industries.
27
Research of the long-term contract between GM and General Motors in 1919 shows an
example how a physical asset specificity between two parties shaped the relationship over
time. (See Kilen, 1988, 199-213).
152
Once industries are located in a region, relocatating without substantial cost and political
controversy is difficult. Therefore, physical asset specificity in the Korean cases was
initially fixed by the national government‘s economic plans.
U.S. Cases: Detroit and Pittsburgh
The Detroit automobile industry has dominated the local economy since the early
1900s. However, within the industry, assembly factories have been dispersed outside city
boundaries due to improvements to transportation, particularly highways and
technological development. As a result, the Big Three‘s influence as manufacturers in
Detroit has declined over time. The automobile industry reveals the importance of
physical assets in the relationship between a final assembler and many auto part suppliers.
However, the Big Three‘s assembly plants moved into suburbs in the 1950s; There are
few automobile assembly plants run by Big Three within city limits. Only Chrysler
maintained five assembly plants with a relatively small number of employees. In
addition, physical asset specificity has been reduced in Detroit since the automobile
assembly factories moved into suburbs. Therefore, Big Three‘s manufacturing influence
in the city has dwindled.
Instead, GM maintains its global headquarters in downtown Detroit and has
become one of the biggest employers in the city. In 1997, GM purchased a Detroit
landmark, the Renaissance Center, and moved its global headquarters to that downtown
complex (Meredith, 1996). Many considered this act a rejuvenation of Detroit‘s
automobile industry but did not consider this relocation an exchange between one
153
company and the other: Ford Motor Company to General Motors. As manufacturers, the
Big Three gradually reduced their interests in the city of Detroit, moving their assembly
factories and related facilities to suburbs areas such as Dearborn, Sterling Heights, and
Flint. Between the 1940s and 1950s, the Big Three auto companies built 25 new plants in
suburbs such as Plymouth and Madison Heights. General Motors also built new factories
in Livonia, Warren, and Romulus, all suburbs of the city (Sugrue). However, its new
status as a service industry with headquarters and research and design departments in the
region reshapes its dominant role in the local economy.
Pittsburgh‘s steel and its new industry hardly share the similar characteristics as
the automobile industry structure. Rather, Pittsburgh‘s steel industry created site-specific
development since the industry required raw materials and coal to operate plants. Site
has been very important, making it inconvenient for them to move facilities to other
places. After the main steel company‘s decline, the Pittsburgh area maintained the steel
industry through ―minimills‖ (Treado, 2009). Even though the main steel production no
longer occurs inside the city limits, minimills outside city limits operate at present and
the manufacturing industry in the city has not completely met its demise. In addition,
current research points out that Pittsburgh maintains significant industrial ties with
intermediate steel-industry suppliers, which remains important to national and
international steelmakers (Treado, 2005; Treado & Giarratani 2008). This research
reveals that the Pittsburgh area not only maintains old specializations from the previous
industry but also shows economic resilience.
154
Clearly the previous physical asset specificity from one steel industry has
declined significantly in Pittsburgh. Previous integrated, big steel mills shut down during
the major collapse in the 1980s. However, once abandoned steel mill sites transformed
into new industrial parks and urban redevelopment projects. Even the steel industry
restructured in the early 1980s, and a large number of firms located in Pittsburgh and
supplied the steel industry created an industrial cluster. Thus Pittsburgh still possesses
specificities for the steel industry. In addition, according to a survey, Pittsburgh‘s steel
industry transformed from the steel product-making market to offering a diverse array of
products and services as part of the supply chain of the steel industry. In 2003, Pittsburgh
had the single largest concentration of firms that supply goods and services to the steel
industry (Treado, 2008).
After the steel industry‘s collapsed, Pittsburgh‘s industrial transformation allowed
other industries to open in the region. The demise of a single major industry clearly
damaged the local economy, but other industries such as healthcare and education and
more specific service industries and advanced manufacturing industries started to take
root in the region. Even though the conventional steel industry had been collapsing since
the early 1980s, the Pittsburgh area‘s remaining steel industry survived, and after the
vacuum of big industry in the locality, a diversified economy provided industrial
reshaping to local industry. Physical asset specificity has changed over time, along with
transformation of the industrial structure. The healthcare and education industry required
different physical assets and the city of Pittsburgh supported those industries once the
economic transformation began.
155
Korean Cases: Physical Asset Fixation
The Korean cases show a somewhat different scenario from the U.S. cases. Due
to the scarcity of raw sources for heavy industry in the earlier stages of economic
development, many ―industrial cities‖ in Korea did not emerge naturally. Rather,
vigorous economic development plans by the national government in the 1960s
designated regions for specific industries. Due to nation economic development plan,
physical specificity was preserved in the automobile industry sector. Factories became
concentrated in industrial parks located in the city limits. The main assembly factories of
the Hyundai automobile company are located in national industrial parks and, in
particular, several national and regional industrial parks are designed for specific
industries such as shipbuilding and heavy metal. This trend is particularly strong in
Pohang.
In case of physical asset specificity, Korean cases have not shown significant
decline in specificity over time. Physical specificity in each industry has been preserved
in the industrial complexes in which companies have located their facilities and plants.
Moreover, the physical asset specificity is not undermined by the firm‘s facility decision.
Conventionally, firms have tended to relocate facilities and plants if there is a better
economic choice such as cheaper labor and land as well as better public services. Korean
manufacturing companies have also followed an international trend by establishing new
plants outside national territories. However, factory relocation is not an easy decision
due to the transaction costs. Detroit‘s Big Three expanded its facilities through business
management strategies, not by closing the main facilities.
156
Some national industrial parks were designed for the specific companies such as
POSCO. Pohang has one national industrial park whose aim was to establish steel plants
for the Pohang Iron and Steel Company. Since 1975, Pohang National Industrial complex
has had the sole purpose of operating an industrial complex for POSCO, within which
only steel-related firms are allowed to conduct business, thus maintaining strong physical
asset specificity in the steel industry of Pohang. Simultaneously, Pohang‘s site
specificity has remained firm during the economic development period. Currently
Pohang‘s effort to develop Young-il Port has enhanced site specificity for the steel
industry.
The national government‘s economic plan alao created a ―safety net‖ for firms in
passive ways. For example, Ulsan has been a nest for Hyundai‘s Heavy Industry and
later for the Hyundai Shipbuilding and Automobile Company. In order to achieve its
national goals in economic development, one of the main national projects was to build
national industrial parks in designated regions. Since 1967, Ulsan has possessed one of
the largest industrial parks in the nation.
In Ulsan, major business established factories within the industrial park, which
was protected by law and supported not only by the national government but also by the
local government. Once companies use industrial parks, in particular national industrial
parks, they tend to be guaranteed not only financial support but also other assistance from
the national government. Once factories establish stable production facilities in an
industrial complex, legitimizing a relocation decision is somewhat difficult. According
to a 2003 Ulsan Development Institute Survey, main industries in Ulsan such as
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automobile, shipbuilding, petrochemical, and heavy metal do not have plans for factory-
relocation. Over 90% of firms responded that they had no immediate plan to relocate
their facilities outside the city (Ulsan Development Institute, 2003)
Ulsan‘s physical assets have been preserved by the national government‘s initial
development plans. National economic plans and later local government efforts to
support major industries have played a major role in exerting physical asset specificity
even after the era of international competitiveness. One of the unique differences in
Ulsan is the economic structure, specifically in its manufacturing industry. Ulsan‘s
economy is led by four major manufacturing industries: automobile, shipbuilding, port,
and petrochemicals. In 2006, Ulsan‘s mine and manufacturing industry produced 11.2%
of total national products. The petrochemical industry has been the first pillar of the
Ulsan economy. Under the first five-year national economic development plan in 1962,
Ulsan became a special industrial region and was promoted to a city. Currently, Ulsan
Mipo national industrial park and Onsan National industrial park include SK Energy
Company, LG Chemical, Samsung Petrochemical Company, Dupont, BASF, and other
companies. Ulsan‘s chemical industry covers 36% of the total national chemical industry.
The automobile industry has been the biggest industry in Ulsan in terms of
number of workers (34% of total manufacturing workers in Ulsan). Ulsan‘s automobile
industry is the combined result of the national government strong support, Pohang‘s Steel
industry, and Changwon city‘s mechanic industry.
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Ulsan‘s shipbuilding industry was also established from the national government‘s
aggressive support especially in the Park Jung Hee era. Ulsan‘s shipbuilding product in
2006 was 39% of total national ship products, along with Gyeongnam (South
GyeongSang Province) and Busan (Taegu Shinmun, September, 2009). The diversity of
Ulsan‘s economic structure helped it overcome the economic crisis of 1997-98 much
more effectively than other regions. Even though criticism has emerged regarding the
Chaebol-led economic concentration in four major industries, the fact that these major
industries created an economic pillar to maintain regional economic development and
sustain the prosperities under the economic crisis is notable.
Sectoral Asset Specificity
Whether a local economy depends on a single dominant industry or diversified
industries coexist in a locality impacts decision making in local economic development.
If a single industry exists in a locality, asset-specific investments are made over time,
including physical and human asset specificity. Once asset-specific investments are
stabilized in a locality, dependence on the single-monopoly industry is increased– and so
is the threat of opportunism. As a result, a hierarchical governance structure has been
made between business and government. In other words, city government relies on the
single-dominant industry for revenue and labor for the community and the dominant
industry may be less interested in local affairs since its asset-specific investments became
too important to ignore.
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Rigid hierarchical governance structures also have been made within an industry
if the single-monopoly industry requires a final assembler and smaller part suppliers such
as in the automobile industry. Relationships can create asymmetrical cooperation when
smaller suppliers are highly dependent on a large final assembler. With a monopolized
industrial structure by a single dominant industry, dependence on one particular industry
can be high and business and local community cannot create a competitive environment
to make more business. In this case, once a city government seeks a new direction for
local economic development, it is difficult to expect the dominant industry‘s cooperation,
particularly when a city government tries to attract different businesses to boost the local
economy. Once dominant power is rewarded to the industry, the relationship between the
industry and city hall remains exclusive, without interruption by other industries. This
relationship prevents other industries from entering the local economy and in the long run,
local economic environment becomes unsuitable for other industries. As a result, the
dominant industry can shape local economic development based on its interests. Local
economic development pathways thus either do not disturb the existing dominant
industry‘s activities or maintain its current industrial structure, which means a less
diversified industrial structure. These regions tend to fail to reshape local economic
structures.
The coexistence of diversified industries in one locality shows a different picture.
Once differentiated industries exist within a region, local governments tend to depend
less on a single industry for its local tax or community workforce needs. Simultaneously,
asset specificity will be reduced since there is no single dominant industry. Since such
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specialized investments are not required, relationships among actors are more symmetric
than in a single monopolistic industrial structure. As a result, city hall‘s decision on local
economic development may be determined either with relatively high autonomy from
business or in close cooperation with business. In the local business community, since
there is no single dominant industry, the business community either cooperates to request
necessary services from city hall or deals with city hall individually. In a competitive
environment, city hall generates relative autonomy in decision making particularly in
local economic development. Under this condition, the relationship between business and
city hall becomes either cooperative or competitive.
In order to understand the impact of different local industrial structure on the local
economy, of the notion of sectoral asset specificity must be considered. Asset specificity
is regarded as a critical parameter in the political economy including in industrial policy
making.
28
In a seminal article published in 1961, Benjamin Chinitz described the
possible impact of economic structure on regional economy. In his article, comparing
Pittsburgh and New York metropolitan regions, Chinitz explored the diverse aspects of
regional industrial structures and their influence on the capacity of regional economies
(Chinitz, 1961; Drucker, 2010). As Chinitz explains, the degree of dominance or
concentration of a particular industry defines the term sectoral asset. Variations in local
industrial structure enable to produce specificity of factors in relation to particular
industries. Specificity of local industrial structure can be regarded more generally or can
28
Hainmueller and Hiscox (2007) present excellent research in relation to measure asset
specificity.
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be defined the level of concentration of industry. Sectoral asset refers to the concentration
of a particular industry in a locality. If one or a few main industries dominate a local
economy, a high level of sectoral asset specificity is expected. On the contrary, local
economic structures shared by various industries in localities have low-level sectoral
asset specificity. The higher the concentration of industry in a region, the more sectoral
specificity can be a factor.
The transformation of local industrial structures from dependence upon a single
dominant industry to a diversified industrial structure has taken place in older and larger
cities in the United States. However, successful industrial restructuring is not common in
old ―rust belt‖ cities. Through their economic transformation, major U.S. cities have
experienced substantial changes in the composition and total size of their residential
populations (Kasarda, 1988). This transformation has been accelerated by international
market fluctuation and competitiveness since 1970s, and older, larger U.S cities have lost
their competitiveness in attracting new jobs or holding existing business. However, once
a locality restructures its economy for postindustrial growth industries, more diversified
industries can exist in the region and relationships between a growing number of business
and local government can affect the pathway of local economic development as well.
In Korea, sectoral asset specificity needs to be closely investigated in each case.
Ulsan had major growth during the period of rapid economic development period. Three
main industries had been main pillars in the Ulsan economy and have been the national
economy‘s main industries for over three decades. Within the manufacturing industry
category, three main industries have created a relatively balanced industrial structure and
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this structure did not change significantly even after the 1997 economic crisis in Ulsan. In
addition, the manufacturing industry in Ulsan hires approximately 37% of the employees
in the region. Ulsan‘s three main industries share a significant percentage of production
in the national economy as well. For example Ulsan produced 26% of the total
automobile production in Korea in 2007. The shipbuilding industry regards Ulsan as one
of the main industrial cities in Korea. Ulsan‘s shipbuilding industry covers close to 40%
of total production and hired 34% of total shipbuilding workers in 2007. This trend has
not changed significantly in the past years. The Ulsan city government has seen the
―diversified‖ industrial structure become a strong backbone to the regional economy as
well as to the national economy.
Pohang city is a single-industry city. Not only has the steel industry been the
focus in the city but also general manufacturing industry has been considered an
economic base in Pohang. Even though the percentage of manufacturing workers in
Pohang gradually declined in the past decade, still more than 20% of workers have been
employed in the manufacturing industry. The single industry dependency in Pohang is
clearly indicated in the percent of metal-related manufacturing workers. Consistently
more than 65% of manufacturing workers have a job in metal manufacturing industry and
metal industry-related companies. Comparing the two cases in Korea, Ulsan has lower
sectoral asset specificity than Pohang due to the concentration of a particular industry.
Pohang maintains ―steel dominant‖ industrial structure, whereas Ulsan‘s industrial
structure has diversified within the manufacturing category.
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U.S. Cases: Detroit and Pittsburgh: Continuation of a Single Industrial Structure vs.
Diversification in Local Industrial Structure
The dominance of a single industry in a locality can be intensified by the
characteristics of the particular industry. For example, the automobile industry has been
a major industry in the City of Detroit for more than a century. The Big Three, also
known as the Detroit Big Three, became a name for the American automobile industry
and the city of Detroit has served as a center of the American automobile industry. The
fate of the city has significantly interweaved with the prosperity of the automobile
industry. This phenomenon remains today. Even though Big Three assembly factories
moved out of the city boundary in the 1950s, major manufacturers, including auto part
suppliers, are closely related to the automobile manufacturers. In 2007, among the 14
manufacturing companies that had greater than 399 employees in the City of Detroit,
eight were automobile and auto part-related companies (Michigan Manufacturer
Directory)
29
– which is why the decline of Detroit‘s manufacturing industry is strongly
tied to the city‘s well-being even though the Detroit is considered a postindustrial city.
Detroit and Pittsburgh show that the industrial structure and characteristics of
industry in localities can make a difference in local economic development over time.
First, it is necessary to examine how industrial structures have differentiated in the two
cities. Table 5.4 illustrates the city of Detroit‘s current industrial sectors, including
establishments and employment estimates between 1997 and 2007. Although health care
29
2007 Michigan Manufacturers Directory, Detroit Economic Growth Corporation
(Retrieved from http://www.degc.org/major-employers.aspx?category=81d7f89e-d678-
4a7c-b9b2-e50be8851e11)
164
and social assistance became the largest industrial sector in the city in 2002, the
manufacturing sector remains significant as the second largest. The number of
employees in the manufacturing industry also indicates that manufacturing industries are
still significant in the city of Detroit. Between 2002 and 2007, the number of
manufacturing industry employees declined to 22,962, but in 2007 manufacturing
industries hired the biggest number of employees in the industrial sector.
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Table 5.4 Detroit Industrial Sectors, 1997, 2002, 2007
1997 2002 2007
Establishment Employees Establishment Employees Establishment Employees
Manufacturing 825 47,487 647 38,019 472 22,962
Wholesale trade 740 12,878 611 10,153 450 7,278
Retail trade 2,253 17,886 2,179 14,760 2,157 12,933
Information n/a n/a 148 7,735 142 9,603
Real estate &
rental & leasing
380 2,279 348 2,486 321 0
Professional,
scientific, &
technical services
718
12,794
832
16,908
705
14,034
Administrative &
support & waste
management &
remediation
service
439
12,556
444
14,403
410
12,154
Educational
services
39
206
76
948 73 1,345
Health care &
social assistance
900 12,747 1,260 46,274 98 9,862
Arts,
entertainment, &
recreation
66 1,773 104 13,671 958 16,550
Other services
(except public
administration)
829 7,518 1,005 7,979 886 6,489
Source: Economic Census, 1997, 2002, 2007
30
In relation to the significant role of the manufacturing industry in local
employment, other data shows the considerable role of the automobile industry in the city
of Detroit. According to SEMCOG data, in 2007, among the eight companies that had
30
Sector 00: All sectors: Economic-Wide Key Statistics: 1997, Sector 00: All sectors:
Geographic Area Series: Economy-Wide Key Statistics: 2002, Sector 00: EC0700A1: All
sectors: Geographic Area Series: Economy-Wide Key Statistics: 2007
166
greater than 500 employees, six were directly and indirectly related to the automobile
industry, including and GM and Chrysler. Among the Big Three Companies, the Ford
Motor Co. and General Motors Co. have more employees than any other organization. In
2007, Ford Motor Co. alone hired 44,000 and the number of GM employees reached
20,800. Regional industrial concentration in Detroit can be seen in the research into
industrial structure. Research into industrial diversification explains the comparison
among the U.S. cities about the degree of diversification in the regional industrial
structure. In this study, Detroit is considered a less diversified industrial structure
compared to other cities including Pittsburgh, which was categorized as intermediate
(Gilmer, 1996).
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Table 5.5 Pittsburgh Industrial Sectors, 1997, 2002, 2007
Source: Economic Census, 1997, 2002, 2007
On the contrary, the city of Pittsburgh shows a different industrial structure and
characteristics of industry in locality. Two tables show the difference of industrial
structure in Pittsburgh. Whereas Detroit‘s employment is heavily concentrated in a few
automobile industry-related companies, Pittsburgh‘s employment illustrates more
diversity from metal product companies to health care service. A growing number of small
1997 2002 2007
Establishment Employees Establishment Employees Establishment Employees
Manufacturing 479 13,924 418 13,416 341 8,408
Wholesale trade 742 12,740 526 9,825 396 6,948
Retail trade 1,544 19,790 1,415 19,576 1,161 16,455
Information 56 1,335 291 16,563 257 10,895
Real estate and
rental and leasing
492 3,974 452 4,386 433 3,813
Professional,
scientific, and
technical services
1,488 21,926 1,614 29,991 1,562 26,980
Administrative and
Support and Waste
Management and
Remediation
Services
466 15,731 495 21,755 476 15,836
Educational
services
45 1,323 87 1,120 86 2,564
Health care and
social assistance
1,070 15,743 1,359 60,260 1,265 63,402
Arts,
entertainment, and
recreation
84 2,331 166 4,988 168 5,512
Accommodation
and food services
1,065 19,012 1,054 19,722 1,144 20,474
Other services
(except public
administration)
722 4,725 1,055 8,036 900 6,580
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and medium-sized advanced manufacturing companies in Pittsburgh have fewer than 500
employees companies. Even though a single dominant industry can be a potential
economic trap, recent analysis has considered the advantages of path-dependence (Martin
& Sunley, 2006; Scott 2006).
Unlike Detroit‘s economic structure, Pittsburgh did not have a single dominant
industry after the collapse of the steel industry in the 1980s. Pittsburgh provides an
interesting case of the impact of the collapse of a major industry on a local economy.
Even though Chinitz (1961) predicted that Pittsburgh‘s economy plummet if a dominant
left the region, the transformation of Pittsburgh‘s local industrial structure shows that the
prediction can be wrong.
The complete shutdown of a single industry offers various possibilities for
reshaping a local economy and for industrial restructuring. Following WWII, city
Republican industrialists formed a strong alliance with thr New Deal Democratic
machine, and launched an effort to rebuild Pittsburgh. A coalition between Mellon bank
chairman Richard King Mellon and Pittsburgh‘s mayor David Lawrence led the
Pittsburgh Renaissance, which privately funded organizations planned and public
agencies and public-private authorities implemented (Gleeson & Paytas, 2005). One of
the leading business community leaders is the Allegheny Conference on Community
Development, led by a board of corporate chief executives. The Allegheny Conference on
Community Development orchestrated the resources and cooperation between the
business community and local government on issues affecting the region‘s economic and
social development. During the steel crisis of the late 1970s, cooperation between the
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business community and Pittsburgh solidified to overcome the crisis, and by 1982, the
Allegheny conference convened a commission to develop a strategy for an economic
restructuring of the city away from heavy industry dependence toward a more diversified
economic base. As a result of these efforts, Pittsburgh‘s economic restructuring started.
However, after the 1980s ACCD declined due to its conservative strategies.
Korean Cases: Pohang and Ulsan: Specialized Single Industry vs. Diversification of
the Manufacturing Industry
A single dominant industry outside the United States illustrates a relatively
different understanding of the impact of industry on local economy. Industry affects
local economy as well as national economy due to the importance of its economic status.
Conventionally, a single industry in a city or region is the result of national economic
development plans. In Korea, the national government established a five-year national
economic development plan in 1963, and through the plans, specific regions and cities
have specialized in particular industries.
These cities did not emerge in a natural way but rather were designed by the
national government. Once the city was born, national government‘s significant support
expanded the city‘s physical size as well as its population. With national government‘s
favor for specific companies came the strong relationship between business and localities
in specific regions. Imbalanced regional development became an inevitable by-product of
partially planned economic development, and in order to alleviate the regional economic
disparity among regions and cities, a decentralization proposal crystallized in the 1980s
170
and early 1990s.
31
Once the decentralization process started, local governments obtained
more permission-power and approval-power over local economic affairs. Newly
obtained administrative power in local governments provided a different perspective of
relationships with business. With new administrative power, local governments
controlled more business affairs in their localities. However, this emerging power also
showed the disparities among regions because some localities exercise more autonomy in
dealing with business than others.
Including the automobile industry, three main industries have been crucial
economic pillars in the Ulsan economy, and these industries have been the national
economy‘s target industries for over three decades. Within a manufacturing industry
category, these main industries created a relatively balanced industrial structure. The
31
It is relevant to look over the debates about what caused decentralization in Korea. The
history of decentralization in Korea is long, going back to 1945 after liberation from
Japanese colonization. In 1961 before the military coup d‘état by Park Jung Hee, Chang
Myun‘s administration made a full pledge to decentralize, and even to include local direct
election. However, in 1962, leaders of the coup, particularly, Park Jung Hee, postponed
the decentralization process for the sake of national security and pushed more urgent
tasks such as economic development. Park Jung Hee‘s administration and its successors,
Jun Doo Whan‘s and Roh Tae Woo‘s administration (both are considered authoritarian
and transitional regimes) pledged decentralization as a political bargaining chips for the
presidential and national elections. In 1987, the democratization movement reached the
peak, and Rho Taw Woo (at that time a strong presidential candidate of the ruling party)
promised that the ―long abandoned promise of decentralization‖ would become real
during his administration in order to alleviate the pressures not only from below but also
from opposition parties. In this sense, Korean decentralization process can be explained
as part of the political bargaining between an authoritarian regime and democratization
movements in order to maintain the regime. Decentralization itself became a ―symbol of
democracy.‖ For the ruling party, decentralization became a bargaining chip to negotiate
with opposition parties in national elections as well as propaganda for the constituency.
Another explanation is the neoliberal policy shift in Korea. In order to follow the
international trend of decentralization and neoliberal deregulation, the Korean
government accepted decentralization as part of neoliberal policies.
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manufacturing industry in Ulsan hires approximately 37% of employees in the region.
Ulsan‘s three main industries share a significant percentage of production in the national
economy as well. For example Ulsan produced 26% of the total automobile production in
Korea in 2007 (Ulsan Metropolitan City). Ulsan‘s shipbuilding industry covers close to
40% of total production and hired 34% of total shipbuilding workers in 2007. This trend
did not change significantly over the past years. However, still the automobile and
transportation-related industries have been crucial for employment. Between 1994 and
2006, more than 20% of total manufacturing employment was concentrated in the
automobile industry. Compared to the automobile-related industry, other target industries‘
employment did not change significantly. In the same period, the petrochemical industry
covered close to 5% and transportation equipment industry maintained 10% of the total
manufacturing employment.
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Table 5.6 Pohang Manufacturing Industry Percentage by Establishment and Employees
Manufacture of Basic
Metal
Assembling Metal
Products
Non-Metal Mineral
Products
Year Establishment Workers Establishment Workers Establishment Workers
1994 12 51 20 14 12 8
1995 18 55 15 13 11 8
1996 15 54 19 13 11 8
1997 14 55 21 14 12 8
1998 16 60 16 11 14 8
1999 17 61 16 9 12 7
2000 17 61 15 8 12 7
2001 20 62 16 9 10 7
2002 20 62 15 8 9 7
2003 17 60 16 9 9 7
2004 17 62 16 8 9 8
2005 17 60 15 8 9 7
2006 16 56 15 10 9 7
Source: Statistical Yearbook of Pohang and Gyeongsang bukdo, each year
In Pohang, the steel industry has been the main industry in the city while the
general manufacturing industry has been considered the main economic base. Even
though the percentage of manufacturing workers in Pohang gradually declined over the
past decade, still more than 20% of workers are employed in the manufacturing industry.
Single industry dependency in Pohang is seen in the percent of metal-related
manufacturing workers. Consistently more than 65% of manufacturing workers have jobs
in the metal manufacturing industry and metal industry-related companies.
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In the city of Pohang, sectoral asset specificity has been far greater than in any other city.
Higher sectoral asset specificity requires more uniquely designed support from the local
government in order to maintain the relationship between business and local government.
The extent of selective trade protection in individual sectors from the national
government has enhanced sectoral asset specificity in Korea, which has led to support for
the view that selective government intervention, if well executed, could be a major
contributor to growth. Since the locality has higher sectoral asset specificity due to the
concentration of a few industries in the region, local government continuously relies on
national government support and major industries in the region in order to maintain the
local economic development. This condition functions as a hindrance when local
economic restructuring is required.
5.4 Conclusion
Why do cities choose different economic development patterns? In order to
answer this question, this chapter focuses on the relationship between business and local
governments under different conditions: asset specificity. With the insight of a
transaction cost approach, this chapter explores the impact of asset specificity on a local
economy. Human assets, physical assets, and sectoral assest are part of why each city
chooses different local economic development patterns. Whether a single dominant
industry exists or diversified industries perform in a region affects future local economic
development pattern.
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Table 5.7 Degree of Asset Specificity
Detroit Pittsburgh Ulsan Pohang
Human Asset low intermediate high high
Physical Asset high intermediate high high
Sectoral Asset high intermediate intermediate/high high
Human asset specificity is an important factor for the industry‘s crucial decision
making including the consideration of facility relocation. Technology development and
wage competitiveness means the impact of human asset specificity declined significantly
in the U.S. cases, whereas the Korean cases still indicate the importance of human asset
specificity through various factors such as maintaining manufacturing industry-oriented
industrial structures and growing labor union activities for securing job security and
diverse (re)educational programs in the firms. However, between two cases in the U.S.,
Pittsburgh has seen a greater change in human assets. After the steel collapse, healthcare
and education became the major industry in the region and two major universities in the
city trained skilled workers for the new industries. Whereas the city of Detroit shows that
11% percent obtained college graduate or advanced degrees in 2000, Pittsburgh‘s
educational attainment in this category is twice that. In 2000, 26% of Pittsburgh residents
received college or advanced degrees. For example, the current steel industry requires
advanced skilled workers. Manual workers‘ numbers declined but skilled advanced
worker were in greater demand. Detroit automobile industry workers‘ qualifications are
different. Most auto part assembly factories require relatively simple manual work, and
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human asset specificity is lower, which means that business has more power to move its
facilities to another place that can provide a comparative advantage, particularly cheap
labor. Pittsburgh has a higher level of human assets, in particular new human assets with
a higher level of education attainments and service industry-related labor. City
government‘s economic development policies are more focused on supporting the new
industry.
Comparing to the U.S. cases, South Korea‘s cases illustrate the consistent human
asset specificity. Even though technology improvement and active relocation of the
factory to more labor cost efficient regions has reduced the impact of human asset
specificity in the traditional manufacturing industry, specialized human assets in Ulsan
and Pohang remain important—and actually have been enhanced by growing labor union
activities in Ulsan. Ulsan has been a center of Korean labor movement since the 1980s
and the labor union activities have helped expand job tenures in the manufacturing
industry. Maintenance of human assets in each city fosters a cooperative relationship
between business and the local government reducing the likelihood that the company will
relocate its facilities.
Physical asset specificity can lead to a monopolized industrial structure in a
region and clearly affects local affairs either in the community or in the city
government‘s policies. In a city government‘s policies, the economic development plan
has to do with dominant industry. Firms would give greater consideration to market
uncertainty than political uncertainty because city government support has been
guaranteed and city government services have been designed for the industry. Less
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involvement of business in local economy becomes a double-edged sword for local
governments. Local government would deal with less conflict with business because of
its lack of involvement in local economic development. Simultaneously, potential
difficulty arises if local governments need private investments for local economic
rejuvenation. With a single dominant industry, business and local government are locked
into a bilateral monopoly structure and once the specific relationship is formed, either or
both parties might engage in opportunistic behavior. This particular case was witnessed
in Detroit and Pittsburgh (before the Steel Collapse).
Physical asset specificity in Pittsburgh can be explained as transformation. Old
physical asset specificity in steel industry declined significantly due to the steel demise in
the 1980s. Instead of old physical assets, new physical assets have filled the vacuum.
Healthcare and education became new target industries in the region and these new
industries required new facilities such as hospitals and universities. The more these
industries became important in the region, the more new physical asset specificity was
created. Since these industries generated more jobs than other industries in the region,
the city government‘s development policies tended to focus on support for these
industries.
The Korean cases show somewhat different scenarios from the U.S. cases. Due to
a scarcity of raw sources for heavy industry in the earlier stages of economic
development, many ―industrial cities‖ in Korea did not emerge naturally. Rather, since
the 1960s national government‘s vigorous economic development plans designated
regions for specific industries. Ulsan and Pohang are leading examples of how national
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government‘s economic plan created cities as well as established heavy industries over
time. Once industries are located in a region, relocating the firms without substantial cost
and political controversy is difficult. National and regional industrial parks surround the
city and continuously receive various forms of support from the national government.
The Korean cases preserved physical asset specificity in the respective regions
more than the U.S. cases. Due to national economic development plans, physical
specificity was preserved in each industry. Main assembly factories of the Hyundai
automobile company are located in national industrial parks, and several national and
regional industrial parks are designed for the specific industries such as shipbuilding and
heavy industry. This trend is particularly relevant to Pohang. Closely associated with
POSCO, Pohang‘s national industrial park was established for the Pohang Steel Company.
Current city development policies still focus on the expansion of steel industry as well as
promoting other industries. However, the dominance of the steel industry influences the
city government‘s economic development significantly.
Traditional manufacturing factories require relatively large spaces for their
factories compared to the service industry and advanced high tech industry, which is why
negotiations with city hall are critical to maintaining or lowering their transaction cost. If
costs are higher than anticipated, companies will either leave or renegotiate to seek more
incentives from city hall. A single-industry economic structure and a diversified
industrial structure afford different levels of power to city hall and business. In Detroit,
the dominant industry constrains city hall‘s capacity.
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Pittsburgh was relatively successful in promoting different types of industry after
the steel industry collapse in part because the city government and business community
as well as national government tried to reduce market and political uncertainty. The
diversified industrial structure gave city hall and businesses a more flexible relationship.
When new firms flow into localities, the relationship between business and city hall is
shaken. The traditional business community needs to welcome new members in order to
boost the local economy. In the business community, new-comers try to create their own
cluster as well as cooperate with the ―old‖ business community. Pittsburgh, for example,
has three main pillars to its local economy: financial companies such as Mellon Bank and
PNC, major universities (University of Pittsburgh and Carnegie Mellon University) and
medical care service (UPMC) as well as life sciences, robotics, and the information
industry.
The level of industrial concentration in a region can be understood as sectoral
asset specificity. In Detroit, automobile-related sectoral assets have been higher than
other industries even though the Big Three‘s facilities moved toward the suburbs. Since
the automobile sector‘s concentration has been highly maintained in the region, the city
government has sought alternative sources for an economic boost. One of the alternative
options was to receive federal support. Detroit has several federally funded urban
redevelopment and business rejuvenation programs including the Detroit Empowerment
Zone and Renewal Communities. Under the Planning and Development Department, the
main goal of Detroit‘s economic development is to strengthen and revitalize city
neighborhoods and communities. It focuses mainly on revitalizing the city through tax
179
incentives programs that are assisted by federal and state tax credit programs. For
example, the Business Development Part under the Mayor‘s office of Targeted Business
Development provides several development tax incentive programs. Among seven tax
incentive programs, no single tax incentive program is run by local government. Most
program funds are provided either by federal or state or joint state and local government
programs. Empowerment Zone Tax incentives and Renewal Community Tax incentives
are part of the federal programs.
Pittsburgh‘s steel sector asset specificity drastically reduced with the steel
industry‘s demise in the U.S. New industries replaced the steel industry rather quickly.
Due to a more diversified industrial structure after the steel decline, sectoral asset
specificity in Pittsburgh has become less significant. However, still the industrial
structure is not extremely diversified and new industries try to form industrial clusters;
Pittsburgh‘s asset specificity can be considered intermediate. Since sectoral
concentrations in the industrial structure are not severe, the city government focuses on
diverse support for a broader range of businesses. Even though several new target
industries in the region are replacing the steel industry, they cannot compete with the
previous steel industry in the region.
Korean sectoral asset specificity is the result of the national government‘s
economic development plans. Traditional national economic development policies have
focused on the promotion of specific industrial sectors that contribute to economic
prosperity. With these development plans, few industrial cities are closely linked to
specific industrial sectors and these industrial cities have been the sites of large industrial
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projects that were expected to promote additional economic activity. Ulsan and Pohang
were the main benefactors of national economic development plans during the rapid
economic development period. Ulsan has been home to the Hyundai group, including
Hyundai Motor Company, Hyundai Shipbuilding, and petrochemical industries, whereas
Pohang has been a base for the Korean steel industry, in particular, POSCO.
Sectoral concentration in the industrial structure in Ulsan needs is somewhere
between intermediate and high. In the case of categorical division, the manufacturing
industry‘s concentration has been high compared to other cities; but within the
manufacturing industry, the main industries are automobile, petrochemical, and
shipbuilding. Ulsan Metropolitan City‘s government focuses on expanding existing
industries. One of Ulsan city‘s development policies is to expand regional industrial
parks in order to attract existing industries as well as prospective new industries.
Currently nine regional industrial parks have been finished or are being built in the
regions and are mainly targeting companies related to existing industries.
Pohang‘s sectoral asset specificity is the highest among the four cases. The steel
industry‘s dominance in the region has not changed significantly and the influence of
POSCO also has not reduced despite privatization in 2000. Not only does POSCO
dominate the local economy, but also other manufacturing industries in Pohang heavily
relate to the steel industry. The single industry-dependency in Pohang leads local
economic development for the interest of the steel industry.
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Figure 5.1. Asset Specificity in Each City’s Sectoral Assets
H
Physical Assets
L H
L
Figure 5.1 shows the overall relationship of asset specificity in each city. Both
Detroit and Pohang present a high level of sectoral asset specificity compared to other
cities. Pohang represents a high level of asset specificity in both assets. Pittsburgh‘s asset
specificity shows much lower levels than any other cities in this research. There are
several unanswered questions with regard to this relationship. Which direction do cities
choose for local economic development? Has Pohang remained the highest level in asset
specificity? Does Pittsburgh‘s economic development go to more physical asset
specificity since the emerging major industries in the region tend to form industrial
clusters?
Detroit Pohang
Pittsburgh
Ulsan
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CHAPTER 6:
CONCLUSIONS
6.1.Overall Summary
Local economic development may be defined as increases in the ―local
economy‘s capacity to create wealth for local residents.‖ Such increases occur if local
resources, such as labor and land, are used more productively. Economic development
can occur through local job growth, which causes unemployed labor and land to be used.
But economic development also occurs by shifting employed labor and land to more
productive uses, for example to better jobs. Local economic development is arguably
affected by all local government activities. Many proponents of urban political economy
research have ascribed the different pathways of local economic development to their
limitation of capacity (city limit) to overcome rapid economic restructuring during the
past decades. Also, other significant research shows the power relationship within the
localities regarding governance (Governing Regime). However, despite these insights
into the specialty of urban policies, few studies have explained the sources and
governance of localities for decisions about local economic pathways in facilitating the
relationship among important players such as the nation state and business in a
transitional economy.
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This study explored possible determinants of pathways of local economic development
in different political settings. International market forces, domestic political institutions,
and local industrial structures and asset specificity in localities provide plausible
explanations for why different cities chose particular development directions.
The impact of international market forces on a local economy is a rising field of
study. Globalization and state devolution establish the contemporary context of urban
governance. Economic globalization has made cities more vulnerable to the fluctuation of
the international economy, compelling them to compete vigorously for infusions of
business investment by offering various sorts of subsides to firms and development
interests. With regard to the interconnectivity between international market forces and
industries in localities, the impact of fluctuations in international market condition on a
local economy has been increased over time.
In the case of Detroit and Pittsburgh (before the steel collapse), international
market change led to the significant decline of the local economy and local communities.
The Big Three‘s poor performance partially resulted from growing international
competition; the effect of companies‘ performance reflects the growing unemployment
rate and population decline in the city. The degree of impact of international market
conditions on individual industries also influences later local economic development
pathways. The demise of the Pittsburgh steel industry demands that local governments as
well as local business communities undertake drastic economic restructuring. As a result,
Pittsburgh‘s local economic development focuses more on diversified new industries in
the region. On the contrary, Detroit‘s automobile industry, which did not face the same
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fate as the steel plants in Pittsburgh, sustains an influence on the local economy. Even
though Detroit sought different local economic directions after experiencing difficulties
in the automobile industry, the main economic policies have not been restructured.
Compared to the U.S. cases, the counterparts in Korea received a late-comer‘s advantage
in the international market. The automobile industry in Ulsan and Pohang‘s steel industry
maintain their stable performance with relatively cheap labor and price competition
despite the fluctuation of international market conditions. The consistent performance of
major industries in the region led local economic development toward status quo policies.
Maintaining and expanding the existing major industries in the region became the priority
of local economic development policies. In order to sustain existing major industries in
the region, local government support prioritizes existing industries.
The impact of international market fluctuation on local economy in both countries
shows different pictures. In the case of Detroit and Pittsburgh, the relatively direct impact
of the international market affected the local economy due to the market status of the
major industries in the region. Without a significant safety net from the national
government, Detroit and Pittsburgh (before the steel collapse) had to rely on the major
industry‘s economic activity. On the contrary, in case of Korean cases, the national
government provides a protective safety net for the major industries in order to sustain
growth. As a result, localities where the major industries are located became beneficiaries
of national government support.
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Characteristics of political institutions in both countries affect local economic
development pathways. Even in the industrial development process, for example, in the
federal system, natural competitions among the localities are more freely exercised than
in the unitary system. The supralocal influence on the local economic development is
obviously exerted in the unitary system. Domestic political institutions give several
explanations for the U.S. cases and South Korean cases in terms of the characteristics of
federal and unitary systems. Federal systems support more autonomous power to
localities so that there is more opportunity to decide their local affairs. A federal system
has no solid national economic development plan such as the five-year economic
development plan in Korea. Therefore individual localities try to overcome external
pressures such as international market fluctuation.
Even though programs of the U.S. federal government seek to alleviate local
issues, most cases receive an after-treatment method. For example, Detroit has been one
of the federal government‘s constant concerns and has thus been a recipient of federal
support program with regard to the local economic and social crisis. Compared to Detroit,
the contribution of federal government support in Pittsburgh has not been significant.
Local competition and the attraction of new capital became a main concern in local
governments. In order to sustain local competition, most local governments seek a variety
of methods for obtaining business attention in their localities. This phenomenon is more
widely accepted in the federal system.
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The unitary system in Korea shows distinct characteristics of the developmental
state, which consists of a strong national government and a relatively weak civic society.
The developmental state model in Korea brought close attention to the national economic
development plan such as the five-year economic development plan from 1962. Strong
developmental state tendencies continued until the 1991 Local Autonomy Act. The 1991
Local Autonomy act provides new opportunity for localities to compete with each other
in order to obtain national government support. However, it is not a decisive conclusion
that the developmental state mentality in Korea ceased with national economic
development.
Even though the national government pays more attention to territorial balance in
development policies than before, path-dependence tendencies are still deeply embedded.
In addition, localities such as Ulsan and Pohang, where the major industries are located,
have been consistent recipients of national government support. No matter how much
national economic plan has changed, the path-dependent tendency did not change
drastically in the existing industrial cities. Ulsan and Pohang have continued to be
beneficiaries even after the decentralization process. They utilize their local capacities,
which have accumulated over time through the national government‘s substantial
supports. They generated their own prosperities through existing industries and whenever
national economic plans have been set, their economic importance has been consistently
acknowledged.
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Devolution became commonplace in many countries across the world, regardless
of their initial level of decentralization. The degree of institutional transformation is
greater in Korea where a local autonomy act was established in 1991. In Korea, the late
1980s and early 1990s marked a period a radical economic and political change, and
democratization and devolution came hand in hand. The decentralization process in
Korea provides an opportunity for localities to exercise interlocal competition for the new
growth-pole in the national economy. Switching the major industry from traditional
heavy industry to high technology and service industry alarms the local government and
interlocal competition for national government supports has intensified. Nevertheless,
even though national government‘s economic plan has drastically changed, existing
growth-pole cities such as Ulsan and Pohang did not lose the national support
significantly. Still maintaining ―existing developmental state‖ status, national government
uses decentralization as a new tool to ―pull‖ localities.
After the Local Autonomy Act, national government‘s support has been based on
―sound competition‖ and ―strict evaluation‖ by the government department. However,
certain regions already possessed advantages due to the national government economic
development plans over three decades. For example, it is very unlikely that Ulsan
metropolitan will lose national government supports or the opportunities to participate in
national projects such as the ―new industrial site selection‖ or the ―formation of new
industrial clusters‖ within the region due to the importance of Ulsan‘s economy in the
domestic economy. However, the picture is a little differently in Pohang. In 2007, a
rumor was circulating that POSCO headquarters was going to relocate to another region.
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POSCO announced it had no plan to relocate its headquarters. However, POSCO did
announced that the company would establish an R&D department in new location, which
happened to be Incheon Metropolitan city. Incheon is one city that had been aggressively
promoting new institutions, companies, and other facilities into its region. Incheon city
promised better tax incentives and other accommodations for the company. Economic
advantages became strong driving forces after decentralization. Before the
decentralization, national government played a strong regulatory role even in the location
of a company/factory‘s relocation.
Korean cases consistently show the influence of national government on the
local economy. Both cities are the creation of the national economic development plan
and embedded industries in localities. Even after decentralization, the national
government paid closely attention to these two cities due to the economic importance of
their industries. The difference, however, is noticeable between Ulsan and Pohang in
terms of negotiation power. The Ulsan Metropolitan City Government guarantees the
equivalent administrative power to the Province under the constitution, whereas the city
of Pohang remains located within a Province (GyeongSang Bukdo: Northern
GyeongSang Province), which means it must deal with its provincial government as well
as its national government when it makes a main economic development plan.
Simultaneously, the industrial structure in both cities varies. Even though both cities are
categorized as industrial cities or manufacturing cities, difference of industrial structure
show the possibility of another explanation for why Ulsan and Pohang‘s economic
development pathways differ.
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Traditionally in top-down development approaches and bottom-up development
approaches it is hard to ignore the role of higher levels of governments. Some localities
rely more on higher levels of government support in order to reorganize and enhance the
local economy; in the face of economic crisis, this tendency became more significant. In
the case of the main industry‘s concentrated structure, local economy heavily depends on
the main industry‘s performance. If the main industry decides to relocate its facilities to
other localities, local economy is impacted. Detroit‘s Big Three shows a prominent
example of how the main industry concentrated industrial structure affects the local
economy.
Local industrial structure provides an understanding of how an industrial structure
affects local economic development pathways in different national and local contexts as
well as through the given characteristics of industry. In order to understand the impact of
asset specificity on a local economy, three asset specificities are examined under the
transaction cost approach. The transaction cost approach sheds light the relationship
between involved parties regarding diverse decision making. Among other significant
points for understanding the decision making of involved parties, uncertainty issues can
provide relevant explanations about the complexity of relationships between parties.
Asset specificity is constantly transformed based on the mobility of capital and labor. If
asset specificity is high in a region, firms do not want to move out unless they are willing
to accrue cost, and thus asset specificity became a strong bargaining tool. Local
governments heavily depend on a particular industry. As a result, when local economic
development issues occur, local government tends to seek business opinions and not
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disturb their ―interests‖ in the region. Simultaneously, the business is not willing to
participate or cooperate with local government because assets are already fixed and it is
known that its interests would be disturbed by a local government decision. As a result,
the relationship between business and local governments may be less cooperative. Asset
specificity changes over time because of the industrial structure in the region, and local
government becomes more vulnerable from domination by business. As a result, local
government‘s service may not attract any more business due to intralocal competition.
For example, other regions can provide better services and incentives. Unless assets are
fixed and unmovable, a firm‘s relocation decision emerges based on market logic.
Human asset specificity is an important factor for industry‘s crucial decision
making, including the relocation of facilities. However, technology development and
wage competition has allowed the impact of human asset specificity to decline
significantly in the U.S. cases, whereas the Korean cases still manage the importance of
human asset specificity through various factors such as maintaining manufacturing
industry-oriented structures and growing labor union activities for securing job security
and diverse (re)educational programs in firms. Compared to the U.S. cases, the South
Korean cases illustrate sustaining human asset specificity in the region. Duration of job
tenure and high level of education attainment allow Ulsan and Pohang to be more human
asset-specific regions.
Physical asset specificity leads the monopolized industrial structure in the region
and clearly affects local affairs in the community and in the city government‘s policies.
In the latter, economic development plans have to do with dominant industry‘s support or
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opposition. In this case, firms consider market uncertainty more than political
uncertainty since city government support has been guaranteed and city government
services have been designed for their purpose. As a result, unless a city government‘s
economic development plan overlaps with business interests, it tends be less involved
with local economic development. Less involvement of business in the local economy
becomes a double-edged sword for local governments, showing that local government
would deal with less conflict with business because of its lack of involvement in local
economic development. Simultaneously, less involvement indicates a potential difficulty
if local governments need private investments for economic rejuvenation. In a single-
dominant industry model, business and local government are locked into a bilateral
monopoly structure and once the specific relationship formed, either or both parties might
engage in opportunistic behavior. This particular case was witnessed in Detroit and
Pittsburgh (before the steel collapse).
Physical asset specificity has declined significantly in Pittsburgh. Previously
integrated, big steel mills shut down during the major collapse in the 1980s. However,
once abandoned steel mills sites transformed into new industrial parks and became
projects of urban redevelopment. After the steel industry‘s collapse, Pittsburgh‘s
industrial transformation allowed other industries to open for business in the region. The
demise of a single major industry clearly damaged the local economy and other industries
such as healthcare, education, more specific service industry, and advanced
manufacturing industries started to take root in the region.
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Physical asset specificity changed over time along with the transformation of the
industrial structure in the Pittsburgh region. The healthcare and education industries
required different physical assets and the city of Pittsburgh supported those industries
once the economic transformation started.
Physical asset specificity in Korean cases still strongly exists but each case shows
differences. Due to the national economic development plan, specific cities gained
physical asset specificity and over time that specificity has been enhanced (Ulsan as
automobile, shipbuilding, and petrochemical vs. Pohang as steel industry). The Korean
case shows a somewhat different scenario from the U.S. cases. Due to the scarcity of raw
sources for heavy industry in the earlier stages of economic development, many
―industrial cities‖ in Korea did not emerge naturally. Rather, vigorous national economic
development plans in the 1960s designated regions for specific industries. Ulsan and
Pohang are leading examples of how the national government‘s economic plan created a
city as well as established heavy industries. Once industries are located in a region,
relocating is difficult without substantial cost and political controversy. National and
regional industrial parks were built surrounding the city, and they continuously received
support from the national government including financial support.
Physical asset specificity has not changed significantly over time in the case of
Ulsan and Pohang. In Ulsan, major business established main factories within the
industrial park and industrial parks were protected by the national and local governments.
Moreover, business established new factories outside the city as well as internationally.
However, seldom do they relocate factories inside the city. They expanded facilities
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through business management strategies, not by closing the main facilities like Detroit‘s
Big Three. However, in the case of Pohang, a single industry-oriented industrial structure
allows strong physical asset investment, a tendency that is sustained due to the initial
national economic development. The national industrial complex in Pohang city is aimed
at the steel industry, in particular POSCO.
6.2. Uncertainty and Local Economy
While business tries to maximize profits, political decision makers seek efficiency
of policy with or without cooperation from other parties. However, because of imperfect
information and because of growing regional competition among localities, both parties
cannot consider all the possible courses of action, including which transaction costs will
exist in each activity. This bounded rationality provides opportunities for both parties to
evaluate potential benefits in many ways. Also, the threat of opportunism must be
considered. Each party will act in a self-interested way in order to maximize profit, and
they might attempt to take advantage of unforeseen circumstances that give them the
chance to exploit another party. Opportunistic issues will occur in both parties. For
example, a mayor may attempt to use business attraction for political success in a
reelection, or business may manipulative negotiations with city government through its
dominating economic influence. In order to lower the transaction costs associated with
variables, particularly asset specificity and uncertainty, each party seeks optimal— or, at
least, mutually beneficial – relationships. In the process, two variables are particularly
considered— uncertainty and asset specificity. For example, lack of information about
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alternative suppliers (such as other local governments) might lead firms to decide upon
local economic activities amidst uncertainty. Simultaneously, a local government cannot
confirm whether new business is located in a locality as promised or how much new
revenue would be generated by new business, or the possible relocation of existing
industry in a locality. In addition, a local government hardly predicts the cooperation or
refusal of a business when it designs local economic development pathways. This
imperfect environment creates uncertainty, though the range of uncertainty varies based
on the study field. Asset specificity is important because once asset-specific investments
are made, future trades are tied to this transaction and, in the future, asymmetric
relationships between or among parties would be decided.
Asset specificity and uncertainty in diverse national contexts show a different
understanding regarding the relationship between business and city government. In the
case of the market-oriented state (i.e., the United States), lack of safeguards to reduce
uncertainty lead to complex relationships between business and city government.
However, state-oriented governments create relatively strong safeguards for local
economic development so that asset specificity will be a more important issue for
deciding on the possibilities of a cooperative relationship between business and city
government.
Harvey (1989) argues that since President Nixon declared an end to the urban
crisis, following the dramatic reduction of the federal subsidies to cities, U.S. local
governments have become less interested in managing residential services and more
preoccupied with economic development stimulation strategies. This phenomenon has
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been amplified by global competitiveness among localities. This shift toward
entrepreneurialism in locality pushed local elites to create business-friendly
environments. Jessop (1998, 2000; Jessop & Sum, 2000) elaborate upon Harvey‘s
argument, explaining that globalization has intensified interurban battles over resources,
as well as city efforts to attract business. He said that such an environment has made
cities ―more significant nodes and vectors in organizing economic, political, and social
life‖ than ever before (Jessop, 1998, p.79). Following these arguments, reducing
uncertainty becomes a more difficult task for both parties.
Due to different mechanisms for reducing uncertainty in both political settings,
two sets of case cities were aligned differently based on their relationships between
business and city government with variation of asset specificity. The single-monopoly
industry will have less interest in cooperating with other actors including city government
to change the local economy. Since its investments in the locality are considered asset-
specific, the sole dominant business has less interest in cooperating with others to
develop nonspecific assets for the local economy (Detroit). By contrast, a fragmented
group of firms would show more interest in cooperating with each other and with the
government. Since each of these firms may benefit from community investments by the
others, their level of asset specificity is lower.
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In order to protect investments that others in the locality can provide, businesses
may create a network or clusters and the firms in this setting have more reason to
cooperate with each other and with government (Pittsburgh). This situation is intensified
in market-oriented national contexts. Following neoliberal assumptions, interlocal
competition within the territory is guaranteed, as there is no concrete national economic
development plan guiding the local economy. Therefore, business and city government
must seek the best way to maximize their own interests despite relatively high
uncertainty. As a result, both parties form various governance structures based on their
methods of reducing uncertainty.
The same scenario in different national contexts may provide s different picture of
the governance structure. However, in a state-oriented state, business relationships with
governments are not based on a matrix of business or city government domination.
Rather, asset specificity in the locality is fixed by the national government over time
under the national economic development plan and that fixation is intensified in the
process of decentralization. As a result, business in this setting has a motive to continue
the cooperative relationship with the national government. Once a city government‘s
capacity does not satisfy industries in the locality, or there is another supplier to lean on,
the sole dominant industry has no interest in cooperating with the city government‘s
economic development, especially when the industry recognizes its own significance in
the national economy—as with POSCO in Pohang.
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Compared to a single-dominant industry, Ulsan illustrates a different governance
structure between business and government. The industrial structure in Ulsan is
distributed among three main industries, the automobile industry, the petrochemical
industry, and the shipbuilding industry. Even though these industries are categorized as
―traditional manufacturing,‖ their asset-specific investments are dispersed. Relatively
strong local government‘s capacity would be a key factor to reducing uncertainty for
business as well as national government‘s assistance. Ulsan‘s government has shown a
relatively strong capacity to deal with business with the assistances of national
government, and a fragmented group of firms also help the continuation of cooperation
with local government under the decentralization process.
Uncertainty is increased by institutional change such as the local direct elections
in case of Korea. Since 1991 the Local Autonomy Act allowed local direct elections, and
local politicians as well as central politicians who have a solid political ground in
localities, paid close attention. Some regions‘ local elections have been considered a
―midterm election of current ruling party, judging national government‘s performance as
well as individual candidates.‖ As a result, politicians are motivated by the desire for
reelection and recognize the importance of local elections for ―name recognition.‖ These
elections often lead to high-profile promises for large national project in localities and
large commitments to local constituents as well as ribbon-cutting ceremonies for new
plants and facilities. These phenomena can be witnessed in richer areas as well as in
poorer regions.
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Politics are important to understanding local economic development as well as
national economy. Scholars have contended that economic development cannot be
understood without an investigation of political structure. Molotch (1976) has made a
clear argument that localities develop ―growth machines‖ comprised of groups that own
local assets (mostly land) or have locally embedded interests. Locally embedded interests
are expresses in the local economy. In the manufacturing industry, locally embedded
interests are found with the difficulty of relocation decisions in certain circumstances.
Once manufacturing industry is established in the region, a relocation decision tends to be
complex for several reasons. Korea‘s national economic plan‘s legacy strongly affects the
local economy. National economic plans created industrial cities and decided particular
industrial locations. Through those decisions, the Korean government continuously
supports particular cities and regions in order to boost the national economy. For those
cities and regions, national government‘s financial and personnel support has been
steady, and even after the Local Autonomy Act in 1991, those cities and regions did not
lose national government support thanks to their economic status in the national
economy.
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Because all incentive decisions from local government are ―anticipated
decisions,‖ measuring the ―actual‖ value of ex post business activity is somewhat
difficult. First until the final agreement is signed, local governments constantly doubt
business‘s decision. The fact that business has more information channels and a growing
number of local governments are willing to negotiate with better incentives intensifies the
level of uncertainty in local government. As a result local governments keep promising
more incentives in order to compete for business.
6.3. Pathways of Local Economic Development as Reducing Uncertainty
In order to reduce uncertainty, particular external uncertainty (government-
related), differences of national contexts need to be addressed since the relationship
between business and local government tends to be influenced by variations in national
contexts. In the United States, the federal system and neoliberal economic policies create
a unique environment for business and local governments. Because there is no
constitutional guarantee of status, a city possesses only ―limited powers‖ given by the
individual states and home rules. Under the same political setting, Detroit and Pittsburgh
provide different images of local economic development based on their local industrial
structures. Detroit has been dominated by the automobile industry for over a century, and
thus the relationship between business and local government tends to be asymmetrical.
200
As international competition intensified and the automobile industry reshaped from one-
site production to assembly, the automobile industry‘s interest in Detroit has shrunk, and
its interests disconnect it from the host city. However, the Big Three are still the main
employers in Detroit, except the city government, and the directions of local government
economic development seek more external resources to revive local economy.
Uncertainty and asset specificity in developmental states illustrate different
governance structures compared to market-oriented states. In the case of developmental
states, asset specificity in certain localities is heavily embedded over time. For example,
Ulsan and Pohang were designated as ―targeted‖ growth poles for national economic
development for over three decades with specific manufacturing industries such as
automobile, petrochemical, shipbuilding, and steel. Each industry requires asset-specific
investments and the Korean national government continuously provided support to these
cities in order to maintain the industries. This asset specificity was intensified by local
government after the decentralization process. Even though national government did not
provide the same level of support to these localities, already embedded asset specificity in
each city amplifies the importance of each industry not only in national economy but also
in local economy because there is no significant substitute. With the decentralization
process, how to reduce uncertainty is significant to attracting business to a locality-- a
challenge for local government as well as national government.
Before the decentralization process, one way to reduce uncertainty was to
establish industrial complexes in targeted localities. One advantage to business in
establishing factories or facilities in industrial complexes (particularly national industrial
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complexes) is the possibility of reducing uncertainty since the business will then enter the
protective governance structure provided by national government. Local economic
development in each city has been summarized as various responses to growing
uncertainty. To determine the development pathways, level of asset specificity has been
examined. In addition, different political institutional structures contribute in exerting or
reducing uncertainty.
Detroit and Pittsburgh
The Detroit business community and city hall relationship has changed due to a
number of new firms and growing number of new factories in the suburbs. However,
because the single dominant industrial structure still exists in spite of the Big Three‘s
continuous decline, the automobile industry‘s domination cannot be ignored. Moreover,
unlike Atlanta, Detroit does not have a strong African American middle class involved in
the creation of a governing coalition. Also, Detroit‘s automobile companies have
national and international scope interest rather than locally embedded small and middle
range business interests. Simultaneously, the Detroit automobile industry became more
detached from local interests, and more focused on national and international market
sharing and competition. The Detroit business community has had a long history of tight
and effective organization and its social and economic ties led to the Detroit Renaissance
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under Coleman Young‘s administration in 1970.
32
However, even though they do not
share the same interests with city hall and local community in terms of local economic
development, a standard understanding is that once the automobile industry decides, city
hall follows (Savitch & Kantor, 2002, p. 252-260). In order to overcome growing market
uncertainty, Detroit sought more external resources for local economic rejuvenation. One
of the resources came from the federal assistance program. Under the mayor‘s office of
targeted business development, Detroit received support from several federal and state
assistance programs. Between 1992 and 2005, seven tax incentive programs took place in
Detroit city; two out of seven programs were supported by the federal tax credit and the
rest was assisted by the state tax incentives. The main goals of the city of Detroit have
focused on the ―revitalization of the city‖ and ―focusing on the distressed community
revitalization.‖ Federal support for the distressed community‘s revitalization was a
continuous task in the 2000s. A high level of asset specificity (excluding human assets)
in the city of Detroit has contributed to the slow economic restructuring, and prevents the
promotion of new industry in the region.
On the contrary, the city of Pittsburgh shows a different industrial structure and
characteristics of industry in its locality. Whereas Detroit‘s employment is heavily
concentrated in a few automobile industry-related companies, Pittsburgh‘s employment
illustrates more diversity, from metal product companies to health care service. A
growing number of small and medium-size advanced manufacturing companies have
32
In 1970, Ford Motor Company Chairman Henry Ford II organized Detroit Renaissance,
a private non-profit development organization in order to stimulate economic activity
within the city.
203
fewer than 500 employees companies. Pittsburgh has been relatively successful in
promoting different type of industry after the steel industry collapse. In addition, new
major industries such as healthcare and education emerged after the steel collapse and the
business community has been actively involved in the promotion of new industries in the
region. One reason behind this phenomenon is the city government and business
community— as well as the county government— have tried to reduce uncertainty for
new companies. The local business community does not have conflicting interests with
the new industries, so they have been relatively supportive. A diversified industrial
structure gives city hall and business a more flexible relationship. Once new firms flow
into the localities, the original relationship between business and city hall is shaken.
Within the business community, the traditional businesses need to welcome new
members who do not necessarily share the same ―value‖ in localities in order to boost the
local economy. In the business community, new-comers try to create their own cluster as
well as cooperate with the old business community. As a result, Pittsburgh has three main
pillars of local economy: financial companies such as Mellon bank and PNC, major
universities (University of Pittsburgh and Carnegie Mellon University), and medical care
services (UPMC), as well as life sciences, robotics, and the information industry.
In the case of city hall, new firms demands are different from traditional heavy
industry. The traditional manufacturing industry requires land and land-related incentives
including zoning services. However, new firms require more tax incentives and ―quality
of life‖ public services. At the same time, urban redevelopment plans also provide more
attraction to new firms due to the characteristics of the service industry. As a result, local
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economic development decisions in city hall have less conflict with the business
community when urban redevelopment plans are set up as one of the main economic
development policies in the city. As a result, Pittsburgh business support as a part of local
economic development focuses on collaboration with other private organization such as
ACCD. Local economic development programs also focus more on loans, and not on
government tax incentives. For example, among four local economic development
programs in the city of Pittsburgh, only one program provides bonds, and the others offer
diverse loan programs.
Ulsan and Pohang
In the case of Ulsan and Pohang, equal treatment from the national government in
the initial establishment of the industrial city played a crucial role in shaping the local
industrial structure. Consistent infrastructure support as well as critical financial support
from the national government contributed to the reduction of uncertainty. In particular,
national and regional industrial parks became a central element to alleviate market
uncertainty. Once firms reside in the industrial park, they would receive the consistence
of governments‘ support either financial or administrative assistances. National
government‘s economic plan also created a safety net for firms in passive ways. In the
early economic development stages, national government assigned specific industries to
designated regions. For example, Ulsan has been a nest for Hyundai Heavy Industry and
later Hyundai Shipbuilding and Automobile Company, and Pohang is the hometown to
Pohang Iron and Steel Company (later renamed as POSCO). In order to achieve national
205
goals in economic development, a main national project was to elect national industrial
parks for designated regions. Since 1967, Ulsan has possessed one of the largest
industrial parks in both national and regional areas. Pohang‘s only national industrial
park is mainly operated by POSCO and allowed to only the steel related firms.
After the 1991 Local Autonomy Act enacted, Ulsan and Pohang pursued diverse
local economic development plans. Lack of a single-dominant industry in the region
allows Ulsan to seek more balanced business support programs in the local government.
Expansion of existing major industrial capacity has been the main economic development
direction, and this direction has not changed significantly since 2002 (Ulsan Metropolitan
City White Paper). Among the main policies in the region, environment-related policies
have been the most prominent since 2006, among them, the Clean Taewha River task.
However, what remains unanswered is whether the direction of local economic
development in Ulsan has altered toward quality of life policies. Even though physical
assets and human asset specificity are higher here than in the counterparts in the U.S.,
Ulsan‘s relatively moderate sectoral asset specificity provides more variation in local
economic development, including environmental issue-oriented policies.
Pohang‘s high level of sectoral and physical asset specificity fostered a rigid
relationship between business and local government. Until 2000, POSCO became a pillar
of the local economy and related metal and steel industry in Pohang have received
consistent national government support. After 2000, privatized POSCO provided
unexpected uncertainty in the region by exercising market-driven economic decisions.
Even though the POSCO headquarters is located in Pohang city, the relocation of POSCO
206
construction, one of the main branches of POSCO, to Incheon city provoked significant
internal turmoil in the city(Chosun Ilbo January 09, 2007). Among four cases, Pohang
has the highest level of asset specificity and industrial structural rigidity. As a result,
Pohang city‘s local economic development plan has not changed significantly since the
city was established. Even after the 1991 Local Autonomy Act, new national industrial
parks have been located in the Pohang city. According to the new regional development
promotion policy, another industrial base was built in Pohang, as Daegu-Pohang Circle
(Korea Herald, 1999). The City of Pohang‘s main development concern has been to
expand the infrastructures, including establishing new industrial parks (Blue Valley and
Techno Valley). Even though the city of Pohang considers environmental concerns as
part of development policies, a priority of economic development policies has been in the
infrastructure development.
6.4. Implications
Each locality possesses different levels of governing capacity to overcome
―uncertainty.‖ The international economy requires international competition not only in
nation-states but also in individual localities. Lack of international competition in a
locality means the decline of a local economy, which in turn escalates overall weakness
of national economy. As a result, the demand of international competition in the
manufacturing industry of each country plays an important role in local economic
restructuring. In this situation, localities that once achieved prosperity through national
economic development plans and later decentralization process escalated. Political
207
decision makers have limited information and knowledge of the implications of particular
administrative designs. They do not always know the implementation model that will
provide the highest future payoff, either in terms of policy prescriptions or administrative
structure. Therefore, localities must rely on their best forecasts for expected benefit from
competing administrative designs. Such forecasts involve assessments of both potential
benefits from a particular design, as well as the probability that the potential benefit will
actually occur.
Determinants of local economic development in two different political settings
can be understood with international market forces, characteristics of political
institutional structures, and the role of asset specificity in the region. The remaining
question is whether the findings in this research possess generalization power. Recent
world city and global city literature shows that characteristics of cities in the North and
South are converging. That cities in the North and South are converging in some of their
most significant objective characteristics means that it is possible to conduct a
comparative analysis among cities in different political settings. Growing international
competition and a more open world economy allows us to reconsider the importance of
the city not only as a place of production but also as a space of everyday life.
Findings in this research contribute to several aspects with regard to the global-
local relationship, role of the state, and industrial structure in the individual city. Direct or
indirect global-local relationship in the city may provide better understandings when
political institutions are considered as well. In particular, the intertwined relationship
between the global and local in manufacturing industry-oriented cities broadens our
208
understanding of dynamics in the era of globalization. Variation of asset specificity in
manufacturing industry-oriented cities also provides a comprehensive framework to
answer why cities choose specific economic development pathways. With the findings
from this research, further avenues of research may consider national contexts and
characteristics of industry in a region. These findings will give further insight to the
relationship between national government and local governments in the same political
institutions in the era of decentralization/devolution. This research validates that different
levels of asset specificity in a city within a nation-state plays a role in evaluating and
establishing local economic developments. Once we fully understand the economic
characteristics of localities, local governments will be able to avoid accruing higher
transaction costs in the decision making process. Study of the individual city and the
level of asset specificity enables researchers to conduct crossnational comparisons. For
example, the Greater London authority and Seoul Metropolitan government would deal
with the dynamics of decentralization/devolution process even though they share the
similar political institutional structure— unitary system. The differentiation of local
economic development policies in both institutions can be understood at the level of asset
specificity.
The characteristics of industry influence patterns of local economic development.
One possible factor is whether the certain city adapts and accepts new industry (such as
the defense) industry into its region rapidly. Also, the city that contains industries favored
by the central government has more power to negotiate and to cooperate with the central
government as well as to curry more support (monetary and infrastructural). However, at
209
the same time, because they do not need to worry about competition with other cities
(because the monopolized defense industry secures its local economy more than other
cities), their local economic development patterns are more traditional and status quo
than other cities that confront severe competition inside and outside. The traditional
manufacturing industry, such as textiles and others, cannot compete with new cities
relying on the second-generation manufacture industry, such as automobile assembly and
equipment building. However, due to international competition and increasing labor
costs, firms move their factories to cheaper labor places such as China and South East
Asian countries. As a result, cities suffer from the loss of factories and demand for
workers. However, some cities quickly adapt to the new manufacturing industry. Some
cities that have traditionally focused on the defense industry tend to be influenced less by
external forces than other cities because of their specialization of industry. So a special
economy and business preoccupation being deeply rooted in the city differs from other
traditional industrial cities because the special economy host and the stimulating the
growth of a new business and the community culture around them.
The limitations of this research will allow further field research to be conducted
with regard to data collection. Case studies in this research give less generalization power
to the findings, for which it is difficult to find all possible alternatives. This case study
limitation is closely linked to data collection. Due to the thin database with regard to the
city, the scope of the research must be narrow. However, considering that a case study
should be treated as a stepping stone for bigger data collection, this research will
contribute to the cumulative data on cities in Korea.
210
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Abstract (if available)
Abstract
Local economic development may be defined as increases in the "local economy's capacity to create wealth for local residents." With current unlimited competitiveness in the international market, cities have become not only a place to produce goods but also a spatial consideration for current and future workers' everyday lives. However, not every city can achieve its desired economic success, and the pathways toward economic prosperity are diverse. How to accomplish the desired level of economic development and what to develop are two different but intertwined issues that should be understood based on political, economic, and social conditions in localities. Variations in local economic development have been explained by the international, national, and local contexts. These political and economic contexts are shaped by the nation state's political structure, the structure of industry in localities, and determining local governance structure. What are the determinants of the type of local economic development in the manufacturing industry cities in different political settings?
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Asset Metadata
Creator
Chang, Hyeyoung
(author)
Core Title
Pathways of local economic development: tales of cities in the United States and South Korea
School
College of Letters, Arts and Sciences
Degree
Doctor of Philosophy
Degree Program
Politics
Publication Date
11/29/2010
Publisher
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asset specificity,central-local government relations,developmental state,local econmic development,OAI-PMH Harvest
Place Name
Detroit
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Michigan
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Pennsylvania
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Pittsburgh
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Pohang
(city or populated place),
South Korea
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Ulsan Metropolitan City
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USA
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Language
English
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Sellers, Jefferey M. (
committee chair
), Dekmejian, Richard H. (
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committee member
)
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Chang, Hyeyoung
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Tags
asset specificity
central-local government relations
developmental state
local econmic development