Industrial reconstruction after the Great Hanshin-Awaji Earthquake

H. Kuramochi¹

¹ H. Kuramochi is Director General, Commerce and Industry Department, Hyogo Prefectural Government, Kobe, Japan

Impact of the earthquake on industry

Industrial activity has a wide range of impacts on personal and social life through employment and vocation in addition to the part it plays in the economy. The Great Hanshin-Awaji Earthquake had a particularly important impact on industrial activities in two ways.

First, the disaster-stricken area was a highly industrialized one, and consequently the damage inflicted upon industry was enormous and serious. Key industries such as transport, machinery and steel, and various other industries such as sake distillation, fashion and tourism were located in the Hanshin-Awaji area- This area was producing around 10 trillion yen of Gross Domestic Product, and two-thirds of all economic activities of Hyogo Prefecture took place here.

The cost of the damage to the area's industry is estimated to be around 5 trillion yen, of which direct damage to business property and equipment accounted for some 2.5 trillion yen and indirect damage, such as business closures, a further 2.5 trillion.

The second prominent feature of this earthquake's impact was that it occurred at a time when the area's industrial structure was in the process of change. A shift was under way from heavy industry to industries more oriented to development, services and information. The premature closure of large factories and the destruction of small and medium-sized ones which were the spearhead of local industrial development as a consequence of the earthquake has disturbed and slowed down the speed of industrial restructuring.

These two features lead us to the challenges that we have to face and deal with after the earthquake. In the short term, we need to stop a downward spiral of the local economy by confidence and quick restoration, and in the medium and long-term, we need to promote the necessary future changes in the area's industrial structure and integrate it into the reconstruction process.

Restoration

Emergency measures to restore industry

Our primary challenge is the earliest possible recovery of industrial activity in the severely damaged Hanshin-Awaji area. In order to ensure this, various emergency measures have been put into operation. These include, for example:

- the establishment of a comprehensive consultation centre for small and medium-sized companies, (offering advice on problems faced by businesses hit by the disaster, such as fund-raising, the procurement of business premises, and legal problems, including the settlement of promissory notes);

- the establishment of loans from an emergency restoration fund at an extremely low interest rate of 2.5% and with no interest payment in the first three years;

- the provision of business premises by constructing temporary factories and cooperative retail stores;

- tax deferment, reduction and exemption;

- campaigns and events to wipe out the negative image of the area and to renew tourism.

To implement these emergency measures, a trans-organizational reconstruction headquarters was established by the national and local governments immediately after the earthquake, and special budgetary arrangements were made by both. So far the national government has enacted 16 special laws and established a 3.5 trillion yen budget (starting with the original budget for fiscal year 1996). The Hyogo Prefectural government has also established a budget of approximately 2 trillion yen for reconstruction so far.

Restoring economic activity

Industry in the affected area was rapidly restored within about six months of the disaster, thanks to the untiring efforts made by both private and public sectors. Although the rate of progress towards full-scale restoration has subsequently slowed down, it is nevertheless continuing steadily. By the end of 1996, it is estimated that economic activity as a whole had been restored to 90% of its pre-earthquake level.

There are, however, increasingly striking differences in the rates of recovery according to types of business. Of course, there has been some delay in restoring some of the local industries which were most severely affected by the disaster, such as the synthetic footwear industry. As far as the manufacturing industry is concerned, production figures generally have been restored to pre-disaster levels thanks to the successful revival of major companies, including those in the steel industry.

On the other hand, the retail, service and tourism industries, which had accounted for about 65% of the net turnover of the disaster-stricken area before the earthquake, are still being affected, mainly because of the movement of people away from the area and because of the decline in tourist traffic. For example, the estimated number of tourists visiting Kobe City in October 1996 was 80% of the level of the same month in 1994. As a result, hotel room occupancies have not yet fully recovered. After implementing the emergency restoration measures, we have begun our initiative to achieve complete reconstruction as follows:

Reconstruction strategy

Our basic strategy for industrial reconstruction is two-fold. First, the full-scale reconstruction projects should aim to construct a new industrial structure that is suited to a society in the 21st century, and not simply restore the region's industry to its pre-earthquake status. Otherwise the economy of this region will not be able to compete either in domestic or in international markets. Second, the favourable characteristics of the region should be used to enhance reconstruction.

Situated almost in the centre of the Japanese archipelago, the Hanshin-Awaji area is an important junction for traffic. The area has also developed as a centre of international trade, with the Port of Kobe. It currently has 97 000 residents of 97 nationalities, 19 foreign schools serve its foreign residents, and it has a good basis for the development of international contacts. The aim of our industrial reconstruction, therefore, is the construction of a new industrial centre that utilizes the economic links with other countries.

Reconstruction plan

A long-term plan for bringing about the reconstruction outlined was formulated in July 1995. That is the Great Hanshin-Awaji Earthquake Reconstruction Plan (we call it the Hyogo Phoenix Plan). It comprises many projects, of which I shall describe several main ones.

First is the creation of an Enterprise Zone. In order to enhance the long-term reforms in industrial structure within the process of reconstruction, industrial activity in the earthquake-stricken area needs to become even more vigorous than it was before the earthquake. The Enterprise Zone project may be regarded as the nucleus of the industrial reconstruction schemes. Under the Enterprise Zone scheme, appropriate sites in the disaster-stricken area are designated as special zones entitled to deregulation and tax incentives as a means of freeing corporate activities for domestic and foreign investment, thus leading to the creation of new industries.

For this purpose, local taxes (real estate acquisition tax and municipal fixed assets tax) will be reduced and deregulatory measures will be introduced. The Enterprise Zone is also expected to function as a market where, as a result of deregulation, imported high-quality goods can be purchased at lower prices, thus encouraging imports and attracting more customers and businesses to the zone. Hyogo Prefecture and Kobe City have already established ordinances which permit the application of special incentive measures to companies located in the zone.

Next, one of the national reconstruction projects proposed last year by the Japanese government's Hanshin-Awaji Reconstruction Commission is the fostering of economic exchanges between the Shanghai-Yangtze Valley economic bloc, which is expected to become an Asian growth centre, and the Hanshin-Kobe economic bloc zone, thus contributing to the economic development of both Japan and China. The project aims to promote direct trade between Japan and China by achieving a substantial reduction in transport costs. To be more concrete, this project includes developing river boats to transport freight directly between the two regions in China and also includes establishing an exclusive berth in the Port of Kobe to facilitate trade. We also plan to construct a new China town nearby the port, with a view to encouraging cultural exchanges as well as economic exchanges.

Beside the Phoenix Plan, there are a lot of projects proposed by the private sector. One of them is known provisionally as the New Industry Creation Research Organization. The object of this project, which operates in collaboration with the Massachusetts Institute of Technology in the USA, is to promote research and to support the development of new industries. Business sectors have come to feel that the process of industrial reconstruction must improve the ability for creative research and development by making use of technologies accumulated in this area and by strengthening collaboration and cooperation with universities and research organizations both in Japan and abroad. After the medium-sized companies within Hyogo Prefecture have completed their assessment of the project, including, for instance, the types of business to be covered by the organization and the scale of research and development, a public corporation will be formed to act as the parent body charged with the promotion of the project. In order to ensure the smooth progress of these various reconstruction projects, the Organization for the Promotion of Hanshin-Awaji Industrial Reconstruction was established in December 1995 jointly administered by the public and private sectors and forming a bridge between them. It supports the commercialization of basic technologies accumulated in the stricken area, it organizes various public relations campaigns and other events to attract customers and tourists, and it promotes investment in the area by Japanese and foreign companies.

Conclusion

By now, for industries in the disaster-stricken area, most of the infrastructure problems caused by the earthquake have been solved. However, the exodus of 150 000 residents, reduced consumption within the area, its negative image as a tourist centre, and the potential fear of further relocation of the manufacturing industry out of this area still remain. These factors can impede progress towards full-scale reconstruction, rehabilitation and restructuring. With this in mind, we shall implement the described activities and projects to stimulate industrial reconstruction and pave the way for the new Asia-Pacific era of cooperation and development.